Do international tax treaties govern financial report quality?

In the context of corporate governance, whether bilateral tax agreements (hereinafter “BTAs”) improve financial reporting quality by restraining corporate tax-avoidance behaviors is an important question.11Financial reporting quality and accounting information quality have the same meaning in the literature. They are used interchangeably in this paper. Using data from China’s non-financial listed companies between 2010 and 2019, this study employs a difference-in-differences approach to explore this research question. We find that BTAs can significantly improve financial reporting quality and exert a governance function by inhibiting enterprises’ tax avoidance, especially for enterprises operating in tax havens, non-state-owned enterprises, and enterprises subject to high tax collection and management pressures. A test of the mechanisms involved shows that BTAs inhibit tax avoidance through reductions of capital weakening behaviors and the creation of unrealistic value contributions, which in turn improves the quality of accounting information. These findings confirm the effectiveness of BTAs in relation to corporate governance, and provide policy insights for the regulation and international context of accounting information quality.