The unforgettable past: The long-term impact of war on corporate tax avoidance in modern China

Abstract

Prior literature related to war effects usually has a short time horizon between the war event and its outcomes. However, little is known about whether the collective war memories can be transmitted across generations, and then impact later generations' decisions in a long-lasting way. Using a sample of 3244 A-share listed companies in Shanghai and Shenzhen from 2013 to 2019, the study finds that firms hiring CEOs originated from regions that were intensively affected by the war during 1931–1945 (i.e., the Second Sino-Japanese War) exhibit higher level of corporate tax avoidance. Moreover, the positive impact of war on corporate tax avoidance is more pronounced for CEOs who are the first generation born in the post-war period. Our mechanism tests show that firms hiring war-affected CEOs are more likely to make philanthropic giving, and have higher corporate social responsibility ratings, but not hold more risk assets, revealing that war-affected CEOs engaging in greater tax avoidance is due to their prosocial preference rather than risk preference. Our cross-sectional analyses reveal that the positive impact of war on corporate tax avoidance is stronger when CEOs are male, less educated, without political connection, with poor experiences and firms face financing constraints, but weaker when firms are under stricter tax enforcement. Above conclusions are robust to a set of robustness checks and still stand after confronting the endogeneity issue.