Employee ownership and corporate tax avoidance: Evidence from employee shareholders in Chinese state-owned enterprises

Abstract

This study investigates how employee ownership aligns the interests of employees and shareholders in the context in which controlling and minority shareholders have divergent interests. Specifically, we focus on ownership by employee shareholders—entities that represent employees in holding shares—and examine its impact on tax avoidance in Chinese state-owned enterprises (SOEs), where such divergent interests are particularly evident. Using propensity score matching and instrumental variable analysis, we find that employee shareholder ownership is positively associated with tax avoidance in SOEs, which is consistent with the interests of minority shareholders. This effect is more pronounced in SOEs where employee shareholders either represent a large percentage of employees or are employee-run firms, and it is also stronger in SOEs with a high-quality internal information environment or strong employee bargaining power. Moreover, we show that SOEs with higher employee shareholder ownership increase tax contributions in regions where government-controlling shareholders are located, despite a reduction in overall tax rates. Finally, our additional analyses reveal that the effect of employee shareholder ownership diminishes in firms with confrontational employee-manager relations, high job offshoring risks, or limited government intervention. This study demonstrates that substantial employee ownership can provide policymakers with a novel alternative for reducing government intervention in SOEs.