Does public governance matter in corporate tax avoidance? Evidence from the anti-corruption campaign in China

Abstract

This study examines whether public governance in China has an impact on corporate tax avoidance. The anti-corruption campaign of 2012 is used as a natural experiment, and we run an event study to investigate how it impacted tax avoidance. We find that tax avoidance was significantly lower after the campaign, which indicates that improved public governance makes it less likely that corporations seek to avoid taxes. Further analysis shows that spending on entertainment and travel went down following the anti-corruption campaign, and the impact of the spending on tax avoidance was also lower. Finally, we find that tax avoidance contributes less to firm value following the campaign, suggesting that investors are aware that tax risk increases when there is more public governance.