Tax enforcement efforts and stock price crash risk: Evidence from China

Abstract

We propose that firms in regions with strong tax enforcement efforts have low stock price crash risk. Using a large sample of Chinese firms from 2003 to 2017, we find that tax enforcement efforts negatively affect future crash risk. This negative effect is stronger among state-owned companies but weaker when information opacity is higher for firms. These results are robust to alternative measures, additional controls, and additional analyses. We also show that tax avoidance and accounting conservatism are two potential channels through which tax enforcement efforts affect crash risk. The findings contribute to the literature by elaborating that tax enforcement efforts not only alleviate tax-avoiding activities but also can act as a governance mechanism in reducing crash risk in an emerging economy context.