Stock market listing and corporate tax aggressiveness: Evidence from legal reforms in squeeze out in Japan

Recent literature argues that agency conflicts between shareholders and managers reduce corporate tax aggressiveness. Although stock market listing is a fundamental source of the agency costs, a dearth of widely available data prevents researchers from investigating how monitoring from stock markets affects tax aggressiveness. We use unique panel data that cover both publicly-traded (listed) companies and privately-held (unlisted) companies in Japan. To mitigate endogeneity concerns about the choice to list stocks on public equity markets, we use legal reforms in squeeze out as a quasi-natural experiment. We provide evidence that stock market listing decreases tax aggressiveness among companies whose ownership is concentrated. This result suggests that minority shareholders f option to sell stocks in public markets reduces managers f incentives to be tax aggressive. Our findings link a function of capital markets with public finance by demonstrating that financial developments can contribute to the effective collection of tax revenues.