AAA Spark Meeting of the Regions

Antitakeover Provisions and Tax Avoidance

• In Event: Tax Avoidance

Abstract

We examine the effect of antitakeover provisions on corporate tax avoidance. Based on a sample of Chinese A-share listed firms with hand-collected antitakeover provisions between 2009 and 2018, we find that the strength of antitakeover provisions is positively associated with tax avoidance while controlling for endogeneity, and the positive relation is primarily driven by firms with lower monitoring mechanisms (i.e., poorer board monitoring, more dispersed ownership, fewer institutional investors, less analyst coverage, lower media attention, lower product market competition, and weaker legal environment), firms with more earnings management and higher operating risk, and state-owned enterprises. Our findings are consistent with the managerial entrenchment hypothesis and suggest that the increase in agency problem that induces self-interested behaviors of managers shielded from takeover threats is likely the mechanism through which antitakeover provisions affect tax avoidance. Our study contributes to the sparse literature on the effect of antitakeover provisions on tax planning and provides valuable insight into the governance role of antitakeover provisions in shaping tax management decisions in the largest emerging market.

Authors

• Zhiying Hu, University of Science and Technology Beijing

• Liya Hou, St. Cloud State University