Competition and tax avoidance: Evidence from quasi natural experiment of the implementation of Anti-Trust Law

Abstract

This paper examines the impact of product market competition on corporate tax avoidance by constructing a difference-in-differences model using a quasi-natural experiment of the Anti-Trust Law. The results indicate that the implementation of the Anti-Trust Law significantly increases the degree of tax avoidance of monopolistic firms by more than 0.01 compared to competitive firms. The main conclusion still holds after a series of robustness tests. Declining corporate performance, increased business risk and subjective dissatisfaction towards regulatory authorities constitute the main reasons. Heterogeneity analysis reveals that the promotion effect of the Anti-Trust Law on corporate tax avoidance is more pronounced for firms located in regions with lower levels of tax administration, firms whose income tax is collected and administered by local tax bureaus, firms with lower quality of information disclosure and private firms. The results provide empirical evidence of the differentiated impact of the Anti-Trust Law on corporate tax avoidance behavior of different firms.