Tax avoidance and firm risk: evidence from China

Prior literature documents puzzling evidence revealing that tax avoidance activities do not affect firm‐specific risk. Using an extended US sample, we find that lower cash effective tax rates (ETRs) are associated with higher future return volatility, supporting the traditional view of tax risk–retu...

Full description

Saved in:
Bibliographic Details
Published in:Accounting and finance (Parkville) 2021-09, Vol.61 (3), p.4967-5000
Main Authors: Cao, Yuqiang, Feng, Zhuoan, Lu, Meiting, Shan, Yaowen
Format: Article
Language:English
Subjects:
Effective tax rates
Firm risk
Tax avoidance
Tax rates
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Prior literature documents puzzling evidence revealing that tax avoidance activities do not affect firm‐specific risk. Using an extended US sample, we find that lower cash effective tax rates (ETRs) are associated with higher future return volatility, supporting the traditional view of tax risk–return trade‐off. In sharp contrast to the US evidence, our analysis of Chinese firms suggests that Chinese state‐owned enterprises (SOEs) with lower cash and GAAP ETRs tend to have lower future risk. In addition, we adopt a difference‐in‐differences approach based on the variations generated by two exogenous, anti‐tax avoidance regulations in China but find no evidence suggesting a causal relationship between tax avoidance and firm risk. Overall, our results suggest that the relationship between tax avoidance and risk varies across countries, sample periods and tax aggressiveness measures, and we highlight the importance of addressing the endogenous nature in future research.
ISSN:0810-5391
1467-629X
DOI:10.1111/acfi.12769