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Profit‐tax relationship, business group affiliation, and external monitoring in china
Author(s) -
Lin Kenny Z.,
Shi Shanshan,
Tang Feng
Publication year - 2021
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/jifm.12128
Subject(s) - scrutiny , business , income tax , monetary economics , economics , enforcement , profit (economics) , corporate group , public economics , microeconomics , finance , corporate governance , political science , law
This study examines whether business group affiliation weakens the sensitivity of income tax expense to pretax income, while external monitoring mechanisms mitigate the effect of group affiliation. We find that this sensitivity is weaker for Chinese listed firms affiliated with a top 500 business group than for unaffiliated firms. Economically, our coefficient estimate implies that group affiliation weakens tax sensitivity to income by 5.2% in relative terms. However, we find that tax sensitivity improved in the post‐2008 period and with the presence of strong monitoring mechanisms by means of tax enforcement, analyst scrutiny, and long‐term institutional shareholding. To the extent that unexplained variation in current tax expense at a given income level is indicative of aggressive tax behavior, our results suggest that effective external monitoring can mitigate this behavior in group‐affiliated firms.