Corporate tax avoidance and stock returns: Unveiling the moderating mechanism of tax plans

Yunxia Bai, Xiaohan Liu and Fahad Alam

International Review of Financial Analysis, 2025, vol. 106, issue C

Abstract: This study investigates how China's rigorous tax plan administration system shapes corporate tax avoidance and its effect on firm value. We find that pressure on tax authorities to complete tax plans compels firms to reduce tax avoidance; and the less corporate tax avoidance, the lower the stock returns, particularly under high tax plan pressure. This suggests that Chinese tax authorities practice “taxation by plan,” which makes lower tax avoidance signal higher political costs and reduce firm value. However, the negative impact of lower tax avoidance on stock returns is not significant in non-SOEs. Mechanism test shows that when non-SOEs reduce tax avoidance, they gain significantly greater access to bank loans and bond financing at lower costs. This suggests that lower tax avoidance in non-SOEs is more likely to signal good credit and exert market incentive effects, partially offsetting the cash outflows resulting from higher tax compliance. This study reveals that improving tax enforcement efficiency requires enhancing the tax compliance credit system, rather than merely relying on traditional compulsive enforcement approaches.

Keywords: Tax plan; Corporate tax avoidance; Stock returns; Political cost; Market incentive (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:106:y:2025:i:c:s1057521925005484

DOI: 10.1016/j.irfa.2025.104461

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