Corporate Tax Avoidance and Firm Diversification: Evidence from Chinese Listed Firms

• Published date: 01 March 2022
• Author: Zhigang Qin,Wen Liu,Maonan Chen
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/asej.12257

Corporate Tax Avoidance and Firm

Diversification: Evidence from Chinese

Listed Firms

Zhigang Qin,

1

Wen Liu

2

and Maonan Chen

3

Received 23 January 2021; Revised 12 October 2021; Accepted 31 October 2021

This study investigates the relationship between the diversified operation strategy

of Chinese listed firms and corporate tax avoidance. In contrast to the traditional

viewpoint that diversified firms are more prone to tax avoidance, the present study

concludes that the tax avoidance level of diversified firms is lower than that of

specialized operation firms. Further research also shows that the nature of the

property rights and supervision faced by firms can affect the conclusion drawn

from the baseline analysis. Our findings reflect that diversified state-owned enter-

prises have lower tax avoidance levels than diversified non-state-owned enter-

prises, and the impacts of internal and external supervision on tax avoidance are

different. A possible explanation for the reduced tax avoidance with diversification

is that diversification weakens internal control and reduces a firm’s ownership

concentration.

Keywords: diversified operation, corporate tax avoidance, corporate governance.

JEL classification codes: B23, C51.

doi: 10.1111/asej.12257

I. Introduction

In the last decade, Chinese listed firms’scale and market value have shown a ris-

ing trend. There has been a remarkable annual increase in the number of Chi-

nese firms in the Fortune 500. In 2019, 119 Fortune 500 firms were from

mainland China and Hong Kong (data source: Fortune), with China ranking sec-

ond to the United States and far ahead of third-ranked Japan. Most of the Chi-

nese firms in the Fortune 500 are listed on Shanghai and Shenzhen A-shares

and Hong Kong and US stock exchanges. There are a few unlisted firms, includ-

ing Huawei. These listed firms’total assets and market values have repeatedly

hit new highs, and they have continued to exhibit high growth. Recent trends

also indicate that larger firms are engaging in inter- and intra-industry activities

*Qin: Xiamen University, School of Economics, Xiamen, China. Liu: The Third Construction Co

Ltd of China Construction Eighth Engineering Division, Nanjing, China. Chen (corresponding

author): Harbin Institute of Technology (Shenzhen), School of Economics and Management,

Shenzhen, China. Email: tai70743060@163.com.

© 2021 East Asian Economic Association and John Wiley & Sons Australia, Ltd.

Asian Economic Journal 2022, Vol.36 No. 1, 3–21 3

supporting several industrial activities. Currently, there is a significant shift

among firms to diversified development. One such example is the TCL Group.

It is a manufacturing firm that deals in multimedia, industry sales and logistics,

home appliances and TCL communications simultaneously. The Zhangjiajie

Group is a tourism enterprise that provides tourism services, travel agency ser-

vices, tourist transportation, hotel accommodation, advertising and multiple

other services. Suning E-commerce is an e-commerce giant participating in retail

and wholesale, finance, installation and maintenance.

As a significant development strategy implemented by firms, diversification

has enabled firms to enter related and non-related business fields. It is important

to establish new business departments and new marketing channels that will fit

with the main business operation. Personnel familiar with the new business need

to be allocated as this will have a great impact on the future operations of the

firms. Major changes will be expected in personnel, organization structures, cor-

porate performance and cash flow of the firms. Drawing on the changes resulting

from diversification, many scholars have discussed the impact of diversification

on corporate value, stock prices, operating performance and other aspects.

Diversification may have a significant impact on corporate performance

(Kaplan and Weisbach, 1992). Hence, diversification will naturally affect tax

revenue and profits. In addition, diversified firms are generally highly leveraged.

Pre-tax credits for interest from high liabilities often serve as a powerful means

for firms to avoid tax; therefore, diversification can affect tax revenue through

liabilities. Further, diversification enables firms to carry out transfer pricing

across departments and regions. The overall tax burden level can be reduced by

transferring profits from departments and regions with higher tax burdens to

those with lower tax burdens. Finally, diversified firms may have weak corporate

governance and internal controls, which will affect corporate tax avoidance.

Some studies have analyzed the differences between diversified firms and spe-

cialized firms. Key characteristics, including R&D and asset scale, have been

investigated, although the differences in the characteristics of these firms cannot

explain most of the changes in tax avoidance (Hanlon and Heitzman, 2010).

Most of the studies in the literature focus on the motives, methods and eco-

nomic consequences of tax avoidance (Dyreng et al., 2010; Hsieh et al., 2018),

and research exploring tax avoidance effects from the perspective of corporate

diversification using data from Chinese listed firms is still in its infancy. There-

fore, this article uses data from Chinese listed firms to study the relationship

between diversified operations and tax avoidance, aiming to provide an insight

into the diversified operations and taxation supervision of listed firms in China.

We first describe how diversification will lead to a reduction of corporate tax

avoidance. We then discuss the effects of the nature of corporate property rights

and the supervision faced by firms on the baseline analysis. Finally, the empiri-

cal results show that the effectiveness of corporate internal controls and the own-

ership structure are intermediary channels between corporate diversification and

tax avoidance.

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