Profit‐tax relationship, business group affiliation, and external monitoring in china

This study examines whether business group affiliation weakens the sensitivity of income tax expense to pretax income, while external monitoring mechanisms mitigate the effect of group affiliation. We find that this sensitivity is weaker for Chinese listed firms affiliated with a top 500 business gr...

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Bibliographic Details
Published in:Journal of international financial management & accounting 2021-06, Vol.32 (2), p.182-206
Main Authors: Lin, Kenny Z., Shi, Shanshan, Tang, Feng
Format: Article
Language:English
Subjects:
Affiliates
Companies
Corporate income tax
Enforcement
external monitoring
group affiliation
Income taxes
International taxation
Membership
profit‐tax relation
Scrutiny
tax enforcement
tax sensitivity
Taxation
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Summary:This study examines whether business group affiliation weakens the sensitivity of income tax expense to pretax income, while external monitoring mechanisms mitigate the effect of group affiliation. We find that this sensitivity is weaker for Chinese listed firms affiliated with a top 500 business group than for unaffiliated firms. Economically, our coefficient estimate implies that group affiliation weakens tax sensitivity to income by 5.2% in relative terms. However, we find that tax sensitivity improved in the post‐2008 period and with the presence of strong monitoring mechanisms by means of tax enforcement, analyst scrutiny, and long‐term institutional shareholding. To the extent that unexplained variation in current tax expense at a given income level is indicative of aggressive tax behavior, our results suggest that effective external monitoring can mitigate this behavior in group‐affiliated firms.
ISSN:0954-1314
1467-646X
DOI:10.1111/jifm.12128