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Financial market opening and corporate tax avoidance: Evidence from staggered quasi-natural experiments

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  • Chen, Yunsen
  • Huang, Jianqiao
  • Li, Xiao
  • Ni, Xiaoran

Abstract

This paper examines whether financial market opening, as introduced by the staggered launches of the Stock Connect programs between China's mainland and Hong Kong, affects corporate tax avoidance. Using a difference-in-differences approach, we find that the financial market opening significantly reduces tax avoidance behavior in Chinese A-share listed companies. In addition, we find that the observed effects are more prominent in firms that experience increased foreign institutional ownership following regulatory changes, and in firms with ex-ante weaker external monitoring and stronger external financing needs. These results are consistent with our hypothesis that financial market opening affects corporate tax avoidance through improved governance and reduced external financing costs. We further find that financial market opening decreases capital costs. Overall, our findings indicate that the opening of emerging financial markets to foreign investors is crucial for curtailing opportunistic tax avoidance by local firms.

Suggested Citation

  • Chen, Yunsen & Huang, Jianqiao & Li, Xiao & Ni, Xiaoran, 2023. "Financial market opening and corporate tax avoidance: Evidence from staggered quasi-natural experiments," Finance Research Letters, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323001435
    DOI: 10.1016/j.frl.2023.103770
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    3. Qin, Yi & Nguyen, Duc Khuong & Cifuentes-Faura, Javier & Zhong, Kaiyang, 2023. "Strong financial regulation and corporate bankruptcy risk in China," Finance Research Letters, Elsevier, vol. 58(PB).

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    More about this item

    Keywords

    Financial market opening; Tax avoidance; Corporate governance; Stock connect;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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