Financial market opening and corporate tax avoidance: Evidence from staggered quasi-natural experiments

This paper examines whether financial market opening, as introduced by the staggered launches of the Stock Connect programs between China's mainland and Hong Kong, affects corporate tax avoidance. Using a difference-in-differences approach, we find that the financial market opening significantly reduces tax avoidance behavior in Chinese A-share listed companies. In addition, we find that the observed effects are more prominent in firms that experience increased foreign institutional ownership following regulatory changes, and in firms with ex-ante weaker external monitoring and stronger external financing needs. These results are consistent with our hypothesis that financial market opening affects corporate tax avoidance through improved governance and reduced external financing costs. We further find that financial market opening decreases capital costs. Overall, our findings indicate that the opening of emerging financial markets to foreign investors is crucial for curtailing opportunistic tax avoidance by local firms.

Automated summary

This paper examines the impact of financial market opening, specifically the staggered launches of the Stock Connect programs between China's mainland and Hong Kong, on corporate tax avoidance. Using a difference-in-differences approach, the study finds that financial market opening significantly reduces tax avoidance behavior in Chinese A-share listed companies. The effects are more pronounced in firms with increased foreign institutional ownership, weaker external monitoring, and stronger external financing needs, suggesting that financial market opening improves governance and reduces external financing costs.