The effect of institutional ownership on listed companies’ tax avoidance strategies

Abstract

The percentage of institutional ownership in China has increased gradually. Does this characteristic of Chinese institutional investors affect their participation in corporate governance, which in turn, affects corporate tax avoidance activities? We take 1108 listed Chinese companies from 2009 to 2017 to study this issue. The paper uses average daily total market capitalization as an instrumental variable to test the endogeneity problems. We run a quantile regression (QR) at the median level as robustness testing to overcome the fat tail of financial data. Then, the shareholding ratio of majority shareholders is introduced to verify that ownership concentration is one of the mechanisms through which institutional shareholders influence corporate tax avoidance decisions. The findings are as follows: The proportion of institutional investors’ shareholdings is positively related to the degree of enterprise tax avoidance. The increase in institutional investors’ shareholdings is likely to promote corporate tax avoidance. When the level of ownership concentration is low, the increase in institutional ownership can play a greater role in promoting tax avoidance.

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