How does stock liquidity affect corporate tax noncompliance? Evidence from China✰

E. Han Kim, Yao Lu, Xinzheng Shi and Dengjin Zheng

Journal of Comparative Economics, 2022, vol. 50, issue 3, 688-712

Abstract: Using an exogenous shock that drastically increased the liquidity of stocks listed in China, we find robust evidence that higher liquidity significantly increases the overall level of tax noncompliance. The increase is more substantial when controlling shareholders own more shares, and diversion for private benefits is less complementary to tax noncompliance. Liquidity has no significant impact on tax evasion—the most aggressive and risky tax noncompliance—and at the higher ends of the tax noncompliance distribution. The positive and significant effects are observed only at lower levels of tax noncompliance. We attribute the weaker impact of liquidity on aggressive tax noncompliance to diversion being more complementary to higher-risk tax noncompliance.

Keywords: Stock liquidity; Corporate tax noncompliance; Stock price informativeness; Share ownership; Diversion (search for similar items in EconPapers)
JEL-codes: G32 G34 H26 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jcecon:v:50:y:2022:i:3:p:688-712

DOI: 10.1016/j.jce.2022.01.008

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