Stock liquidity and corporate tax avoidance
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We show that firms with higher stock liquidity engage less in extreme (i.e., overly aggressive or overly conservative) tax avoidance. The effect of stock liquidity on tax avoidance is economically meaningful and robust across alternative measures of tax avoidance and stock liquidity. The findings also hold after controlling for potential endogenous effects. We further document that the effect of stock liquidity on tax avoidance is amplified for firms with high proportions of activist shareholders and attenuated for firms with high levels of stock price informativeness. Overall, our findings suggest that stock liquidity mitigates extreme tax avoidance by enhancing shareholders’ monitoring over firm management.
KeywordsStock liquidity Tax avoidance Agency conflicts
JEL ClassificationG10 G30 M40
We thank Lakshmanan Shivakumar (editor) and two anonymous reviewers for their helpful comments. In addition, we are grateful to Kathleen Bentley, Christine Brown, Viet Cao, Chen Chen, Tarun Chordia, Bin Do, Doug Foster, Jim Frederickson, Phil Gray, Ferdinand Gul, Ole-Kristian Hope, Jungmin Kim, Clive Lennox, Bing Li, Zhenbin Liu, John Lyon, Jeffrey Ng, Doug Skinner, Jamie Tong, Feida (Frank) Zhang, and workshop participants at Monash University, University of New South Wales, and the 2014 UTS Australian Summer Accounting Conference, who commented on earlier versions of this study. Yangyang Chen acknowledges research funding from Hong Kong Polytechnic University (Startup Research Fund: 1-ZE5C). Rui Ge acknowledges research funding from the National Natural Science Foundation of China (project number: 71202091, 71672165).
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