How Does State-Controlling Shareholders Affect Corporate Tax Avoidance?

Abstract

This paper examines the influence of state-controlling shareholders on the tax avoidance behavior of listed Chinese state-owned enterprises (CSOEs). Using a data set comprising 14,645 firm-year observations from 2003 to 2022, we find that subsidiaries significantly reduce tax avoidance when state-controlling shareholders are required to remit gains to the government under the State-owned Capital Gains Handover System. Following the reform, these subsidiaries also experience declines in cash holdings and financial performance. We attribute these outcomes to increased shifting pressure from controlling shareholders and motivation to meet performance evaluations. Additional analyses reveal that this effect is more pronounced in firms with lower separation between ownership and control, weaker financing constraints, higher operational risks, and stronger internal controls. Furthermore, we observe that most cash flows are diverted through connected transactions. Finally, our findings indicate that subsidiaries that fail to adjust their aggressive tax practices after the reform face declines in firm value. By highlighting the pivotal role of state-controlling shareholders in shaping corporate tax strategies, this study contributes to the literature on state ownership, corporate governance, and tax avoidance.