Abstract
Taking advantage of the agency conflicts between controlling shareholders and minority shareholders and the weak corporate governance in a transition economy, we investigate the relationship between tax avoidance (proxied by effective tax rates) and tunneling (proxied by related-party lending) from a principal-principal agency perspective. We find that corporate tax avoidance is positively associated with tunneling after controlling for firm characteristics, corporate governance, and institutional factors that affect tunneling. This relationship is more pronounced for firms with cash shortages and in periods with relatively weak investor protection. In addition, the value-enhancing implications of tax avoidance are reduced for firms in which tax avoidance is highly correlated with tunneling. By demonstrating the existence of tunneling-related tax avoidance and its economic consequences, this study sheds light on the emerging agency perspective on tax avoidance.
| Original language | English |
|---|---|
| Pages (from-to) | 49-66 |
| Number of pages | 18 |
| Journal | Journal of International Accounting Research |
| Volume | 15 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - Oct 2016 |
| Externally published | Yes |
Funding
We also thank seminar participants at Huazhong University of Science and Technology for their comments. Professors Chan and Mo acknowledge partial financial support from Lingnan University (Project No. DR15A2 and HKIBS) and the City University of Hong Kong (Project No. 7004111), respectively. Professor Tang acknowledges the research funding provided by The University of British Columbia
Keywords
- firm value
- principal-principal agency conflicts
- tax avoidance
- tunneling