The effect of tax avoidance on earnings persistence: evidence from China

Abstract

Purpose

The purpose of this paper is to investigate the relationship between tax avoidance and earnings persistence in the light of a developing economy, with the main focus on China.

Design/methodology/approach

In the analysis, the author conducts a survey on the tax avoidance situation of Chinese listed companies from 2012 to 2020. Then, a multivariate regression analysis is performed in order to analyse the relationship between corporate tax avoidance and earnings persistence.

Findings

The findings of the present study show that tax avoidance has a significant positive effect on earnings persistence. However, when the degree of tax avoidance is high, the “risk effect” of tax avoidance exceeds the “value effect”, and tax avoidance will reduce the persistence of earnings. This conclusion is even more prominent when the company is non-state-owned. Further research shows the increase of institutional investors’ shareholding ratio can improve “value effect” of tax avoidance, lessen “risk effect” of tax avoidance, and positively affect the relationship between tax avoidance and earnings persistence.

Practical implications

This study provides evidence for investors to understand the dual effect of tax avoidance on earnings persistence. The results may have implications for regulatory bodies. They can provide a better understanding of the corporate governance role of institutional investors in curbing opportunistic tax avoidance.

Originality/value

This study enriches the research on tax avoidance effects by analysing the impact of tax avoidance on earnings persistence. This study also compensates for the shortcomings of analysing earnings persistence mainly from the perspective of tax differences in the past, and promotes the study of the corporate governance effects of institutional investors under different levels of tax avoidance.

Citation

Xu, Y. (2024), "The effect of tax avoidance on earnings persistence: evidence from China", Journal of Economic and Administrative Sciences, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JEAS-04-2023-0086