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Stock liquidity and corporate tax avoidance

Author

Listed:
  • Yangyang Chen

    (Hong Kong Polytechnic University)

  • Rui Ge

    (Shenzhen Audencia Business School - Shenzhen University)

  • Henock Louis

    (Pennsylvania State University)

  • Leon Zolotoy

    (University of Melbourne)

Abstract

We show that firms with higher stock liquidity engage less in extreme (i.e., overly aggressive or overly conservative) tax avoidance. The effect of stock liquidity on tax avoidance is economically meaningful and robust across alternative measures of tax avoidance and stock liquidity. The findings also hold after controlling for potential endogenous effects. We further document that the effect of stock liquidity on tax avoidance is amplified for firms with high proportions of activist shareholders and attenuated for firms with high levels of stock price informativeness. Overall, our findings suggest that stock liquidity mitigates extreme tax avoidance by enhancing shareholders’ monitoring over firm management.

Suggested Citation

  • Yangyang Chen & Rui Ge & Henock Louis & Leon Zolotoy, 2019. "Stock liquidity and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 24(1), pages 309-340, March.
    • Handle: RePEc:spr:reaccs:v:24:y:2019:i:1:d:10.1007_s11142-018-9479-6
    DOI: 10.1007/s11142-018-9479-6
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    More about this item

    Keywords

    Stock liquidity; Tax avoidance; Agency conflicts;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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