Tax Shelters, Reputational Costs and CEO Turnover: Evidence from Tax-Violating Enterprises in China

Na Wang, Liangliang Wang, Lirong Zhang and Yin Yu

Emerging Markets Finance and Trade, 2021, vol. 57, issue 7, 1986-2005

Abstract: This paper investigates whether executives will bear reputational costs as a result of using tax shelters within different ownership structures. Based on tax-violation events of Chinese listed firms, we find that CEOs in state-owned enterprises are more likely to bear reputational costs than CEOs in non-state-owned enterprises and that the penalty on executives always occurs in the current year rather than in the subsequent year. In addition, the individual reputational cost of tax avoidance is related to tax aggressiveness and regulatory punishment. The more severe the tax aggressiveness or the regulatory punishment is, the greater the reputational cost of tax avoidance is for CEOs in SOEs. Our findings not only provide direct empirical evidence for the research on the corporate reputational costs of tax avoidance in an agency framework, but they also have great significance for understanding “the Under-Sheltering Puzzle.”

Date: 2021
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DOI: 10.1080/1540496X.2020.1768070

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