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Banking liberalization and corporate tax planning: Evidence from natural experiments

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  • Chen, Shenglan
  • Ma, Hui
  • Teng, Haimeng
  • Wu, Qiang

Abstract

This paper investigates whether banking liberalization affects corporate tax planning by exploiting China's two interest rate deregulations as quasi-natural experiments. We find that firms reduce their level of tax avoidance following banking liberalization and that the identified effect is concentrated in firms with more bank borrowing after liberalization, firms located in non-financial centers, as well as non-SOE firms and firms with fewer political connections. In addition, we find that firms reduce their use of related party transactions and tax-related bribery after banking liberalization. Our results suggest that firms engage in less tax avoidance with more available/cheaper external financial resources and that, on average, the costs of engaging in tax avoidance are higher than the costs of borrowing from banks.

Suggested Citation

  • Chen, Shenglan & Ma, Hui & Teng, Haimeng & Wu, Qiang, 2022. "Banking liberalization and corporate tax planning: Evidence from natural experiments," Journal of Corporate Finance, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:corfin:v:76:y:2022:i:c:s0929119922001079
    DOI: 10.1016/j.jcorpfin.2022.102264
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    More about this item

    Keywords

    Corporate tax planning; Banking liberalization; Capital market policy; Quasi-natural experiment;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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