This study examines whether business group affiliation weakens the sensitivity of income tax expense to pretax income, while external monitoring mechanisms mitigate the effect of group affiliation. We find that this sensitivity is weaker for Chinese listed firms affiliated with a top 500 business group than for unaffiliated firms. Economically, our coefficient estimate implies that group affiliation weakens tax sensitivity to income by 5.2% in relative terms. However, we find that tax sensitivity improved in the post‐2008 period and with the presence of strong monitoring mechanisms by means of tax enforcement, analyst scrutiny, and long‐term institutional shareholding. To the extent that unexplained variation in current tax expense at a given income level is indicative of aggressive tax behavior, our results suggest that effective external monitoring can mitigate this behavior in group‐affiliated firms.
|Journal||Journal of International Financial Management and Accounting|
|Early online date||25 Jan 2021|
|Publication status||E-pub ahead of print - 25 Jan 2021|
Bibliographical noteData are available from the public sources cited in the text. We appreciate comments from an anonymous reviewer and participants at the 43rd International Business Research Conference, Guangdong University of Finance and Economics, Guangzhou University, Hubei University of Economics, Nanjing Audit University, Nanjing University of Finance and Economics, and Xiamen University. We gratefully acknowledge the financial support from the Business Faculty of Lingnan University.
- external monitoring
- group affiliation
- profit-tax relation
- tax enforcement
- tax sensitivity