Ownership structure and tax aggressiveness of Chinese listed companies

• Pages: 313-332
• Published date: 07 August 2017
• Date: 07 August 2017
• DOI: https://doi.org/10.1108/IJAIM-07-2016-0070
• Author: Tingting Ying,Brian Wright,Wei Huang

Ownership structure and tax

aggressiveness of Chinese

listed companies

Tingting Ying

Ningbo University of Technology, Ningbo, China

Brian Wright

Xi’an Jiaotong-Liverpool University, Suzhou, China, and

Wei Huang

University of Nottingham Ningbo China, Ningbo, China

Abstract

Purpose –The purpose of this paperis to investigate the inf‌luence of state shareholding and control versus

institutionalinvestors on tax aggressiveness of Chineselisted f‌irms.

Design/methodology/approach –By exploring recently available tax reconciliation data required

under 2006 Accounting Standardsfor Business Enterprises on a sample of Chinese A-share listedf‌irms, the

authors calculate a direct measure of tax aggressiveness and investigate the inf‌luence of f‌irm ownership

structureon their tax aggressiveness.

Findings –The authors f‌ind that state ownershipand control are positively associated with corporate tax

aggressiveness. A positivelink between the collective shareholding by the top ten shareholders and f‌irm tax

aggressiveness is also found. In contrast, institutional share ownership is negatively associated with

corporatetax aggressiveness.

Research limitations/implications –The results indicate that political connections and ownership

concentration empower f‌irms to pursue aggressive tax planning, whereas institutional investors partially

mitigatesuch inf‌luences.

Originality/value –This paper complements recent studies on tax aggressiveness in the USA by

analyzing tax planning activities of Chineselisted f‌irms. The authors highlight f‌irm ownership and control

factors that encourage aggressive tax planning in China. This paper has important implications for both

public policyand corporate governance in emerging markets similar to China.

Keywords China, Ownership structure, Book-tax differences, Tax aggressiveness

Paper type Research paper

1. Introduction

Prior research has documented signif‌icant cross-sectional differences in tax aggression

among f‌irms domiciled in the USA (Dyreng et al., 2008;Hanlon and Heitzman, 2010) and

suggests that book-tax differences (BTDs) generated by the different reporting rules for

book and tax purposes are related to earnings manipulation and tax sheltering activities

(Mills and Newberry, 2001;Phillips et al., 2003;Hanlon, 2005;Frank et al.,2009;Wilson,

2009;Mahmud et al., 2011;Tang and Firth, 2011;Lee and Choi, 2016). This strand of

literature generally posits that the strength of corporate governance should be negatively

related to tax sheltering activity and/or should mitigate f‌inancial reporting aggressiveness

JEL classif‌ication –G3, H2, M4

Ownership

structure

313

Received 8 July 2016

Revised 7 September 2016

Accepted 3 October 2016

InternationalJournal of

Accounting& Information

Management

Vol.25 No. 3, 2017

pp. 313-332

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-07-2016-0070

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

(Xu et al.,2015;Ebraheem, 2016). This view of tax planning behavior implies that tax

aggressiveness can be viewed on balance as undesirable management behavior, because of

the concomitant lack of f‌inancial transparency that it may induce. Moreover, tax

aggressiveness may facilitatemanagerial resource diversions (Desai and Dharmapala,2006,

2009), rent seeking and bad news hoarding activities (Kim et al.,2011) in the absence of

strong corporate governance.

However, it is not clear a priori that the relationship between corporate governance

mechanisms and tax aggressivenessshould be so unambiguously negative. This is because

tax sheltering activitiesthemselves provide earnings benef‌its and real cash f‌low advantages

to the f‌irm, but may also incur associated costs that may outweigh these benef‌its if tax

avoidance activities are too aggressive or if they arise as a result of managerial incentives

relating to the creation and exploitation of information asymmetries to the detriment of

shareholders. These potential costs include increased information asymmetry because of

managerial opacity and the resultingagency costs, as well as the potential for increased tax

compliance costs because of an increased likelihood of tax audits, revised tax assessments

and litigation. It is therefore possible that the net effect of more effective corporate

governance mechanisms on tax reporting aggressiveness could be positive or negative,

depending on the relative preference for tax sheltering of f‌irm managers and shareholders

(Moore, 2012). Firms with strong corporate governance structures should be able to

minimize their agency problemswith respect to tax position and achieve the optimal level of

tax aggressiveness[2] by alignment of the interests of managers with those of shareholders.

Firms with weak corporate governance could unwittingly provide managers with

opportunities to take advantage of uncertainty within the tax system, and their

informational advantage,to engage in tax aggressiveness that provides them with personal

gain at the expense of shareholders’wealth. This point of view has been evident in recent

studies (Desai and Dharmapala,2006,2009;Moore, 2012) and is particularly relevant in the

Chinese context,given the relative weakness of f‌inancial reporting oversight.

The signif‌icance of political connections as a determining factor of tax aggressiveness has

attracted growing research interest (Adhikari et al., 2006;Zeng, 2010;Wu et al., 2012b;Wu et al.,

2013;Chan et al., 2013), because of its perceived importance as an inf‌luence on f‌irms’behavior.

Recent studies have investigated the effects of the separation of ownership and control on tax

aggressiveness, which provides managerial incentives to pursue self-serving behavior and

potentially increases agency costs. It has been shown, for example, that family ownership

(Chen et al.,2010;Ebraheem, 2016), dual-class stock ownership (McGuire et al., 2012) and public

versus private ownership (Mills and Newberry, 2001) are associated with corporate tax

aggressiveness. However, only a very limited number of studies have examined the effects of

political connections on the tax benef‌its received by f‌irms with different ownership structure

(Adhikari et al.,2006;Wu et al., 2012b). This paper aims to f‌ill this research gap by examining

the tax sheltering activities of Chinese listed f‌irms.

The emerging Chinese stock market is a particularly suitable environment for conducting

this research. A notable difference between China and developed Western economies is that

business relationships in the former tend to be characterized as “relationship-based”rather

than “market-based”(Adhikari et al., 2006). Prior studies show that politically connected f‌irms

receive preferential treatment from the government, including bank loans and favorable tax

treatments (Adhikari et al., 2006;Wu et al., 2012b). It is suggested by Faccio (2006) that the

benef‌its associated with political associations are more pronounced in countries with highly

interventionist governments and weaker property rights protection compared to those of other

countries. Shleifer and Vishny (1997) and La Porta et al. (2002) emphasize that the expropriation

of minority investors by shareholders with a controlling interest is the primary agency conf‌lict

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