Social trust environment and firm tax avoidance: Evidence from China

Changyuan Xia, Chunfang Cao and Kam C. Chan

The North American Journal of Economics and Finance, 2017, vol. 42, issue C, 374-392

Abstract: We examine the impact of the social trust environment in which a firm is located on its tax avoidance in China and paying attention to the moderating effect of corporate governance and state-ownership. Drawing from theoretical and empirical work on firm tax avoidance and manager–shareholder agency conflict, we hypothesize that social trust can lower firm tax avoidance. It is because a high social trust environment can reduce agency conflict so that tax avoidance is less. Our findings are consistent with our hypothesis, and robust to a battery of robustness tests. Furthermore, we document that the association between social trust and firm tax avoidance is more pronounced for firms with weak corporate governance and state-owned. Moreover, we find that firms in more trustworthy provinces present less general and administrative expenses and higher asset turnover, corroborating our theoretical foundations with respect to agency cost in our hypothesis. Our findings suggest that social trust and its interactions with corporate governance and state ownership are important internal and external determinants on the variations in tax avoidance.

Keywords: Tax avoidance; Social trust; Agency cost (search for similar items in EconPapers)
JEL-codes: G0 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:42:y:2017:i:c:p:374-392

DOI: 10.1016/j.najef.2017.07.013

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