Parent firm dividends, financial pressure transmission and tax avoidance among subsidiaries: Evidence from China

Abstract

Although business groups are prevalent globally, limited attention is paid to how financial pressure transmission between parent and subsidiary firms elicits tax avoidance. We explore the impact of parent firms’ dividend policy on their subsidiaries’ tax strategy using China’s mandatory dividend policy as a quasi-natural experiment. We find that parent firm dividends elevate tax avoidance among their subsidiaries. Mechanism tests show that parent firms transmit the pressure of paying dividends to their subsidiaries, compelling them to adopt tax avoidance strategies to alleviate the pressure. The effect is more pronounced among subsidiaries facing greater dividend pressure and external financing constraints and operating in weaker corporate governance environments. Finally, subsidiaries engaging in greater tax avoidance subsequently pay higher dividends. Our findings highlight how intra-group financial dynamics influence tax avoidance among subsidiaries and the significance of financial pressure transmission from parent firms to subsidiaries.