Industry and geographic peer effects on corporate tax avoidance: Evidence from China

• Published in: Pacific-Basin finance journal 2021-06, Vol.67, p.101545, Article 101545
• Main Authors: Liang, Quanxi, Li, Qiumei, Lu, Meiting, Shan, Yaowen
• Format: Article
• Language: English
• Subjects: information learning; market competition; peer effects; Tax avoidance
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2021.101545

This study examines industry and geographic peer effects on tax avoidance as well as their mechanisms and economic consequences in an emerging market, China. Using an instrumental variable approach and after considering a variety of robustness tests, we document causal evidence that a firm’s degree of tax avoidance is positively affected by the average degree of tax avoidance of its peer firms in the same industry or province. Further analyses show that both industry and geographic peer effects are driven by the motives of information learning and market competition and depend on the degree of local tax enforcement and executive tax expertise. We also document preliminary evidence that both industry and geographic peer effects benefit firms by improving their investments, dividend payouts, and future performance. •We examine industry and geographic peer effects on tax avoidance in China.•A firm’s tax avoidance is affected by its peers in the same industry or province.•Both peer effects are driven by motives of information learning and competition.•Peer effects also depend on local tax enforcement and executive tax expertise.•Both peer effects may benefit firms by improving their investments and performance.