TYPE Original Research

PUBLISHED 30 January 2023

DOI 10.3389/fpsyg.2023.1096674

Management equity incentives and

OPEN ACCESS corporate tax avoidance:
EDITED BY
Sheng-Wei Lin,
National Defense University, Taiwan
Moderating role of the internal
REVIEWED BY
Nicoleta Barbuta Misu, control
Dunarea de Jos University, Romania
Tatyana Serebryakova,
Russian University of Cooperation, Russia Xie Wenwu1 , Muhammad Usman Khurram2,3*, Lian Qing1 and
*CORRESPONDENCE Asia Rafiq4
Muhammad Usman Khurram
1
usmankhurram@zju.edu.cn Institute of Digital Finance, Zhejiang University City College, Hangzhou, China, 2 School of Business,
Zhejiang University City College, Hangzhou, China, 3 College of Economics, Zhejiang University, Hangzhou,
SPECIALTY SECTION
China, 4 Institute of Business Management Sciences, University of Agriculture, Faisalabad, Pakistan
This article was submitted to
Organizational Psychology,
a section of the journal
Frontiers in Psychology
RECEIVED 12November 2022 Introduction: Under the modern enterprise system, the principal-agent relationship
ACCEPTED 09 January 2023
PUBLISHED 30 January 2023
can cause a conflict of interest between the two power counterparts, thus affecting
the degree of corporate tax avoidance. As a tool to align the interests of management
CITATION
Wenwu X, Khurram MU, Qing L and Rafiq A and owners, management equity incentives can alleviate the conflict of interests
(2023) Management equity incentives brought about by the separation of powers and, therefore, may influence corporate
and corporate tax avoidance: Moderating role
of the internal control. tax avoidance.
Front. Psychol. 14:1096674.
doi: 10.3389/fpsyg.2023.1096674 Objectives and methods: We examine the relationship between management
COPYRIGHT equity incentives and corporate tax avoidance from both theoretical and empirical
© 2023 Wenwu, Khurram, Qing and Rafiq. This perspectives by using data from Chinese A-share listed companies from 2016
is an open-access article distributed under the
terms of the Creative Commons Attribution
to 2020. Firstly, the effect of management equity incentives on tax avoidance
License (CC BY). The use, distribution or is theoretically and normatively analyzed. Secondly, examine the effectiveness of
reproduction in other forums is permitted,
moderating the effect of internal control and distinguishing the ownership of
provided the original author(s) and the
copyright owner(s) are credited and that the enterprises’ nature through regression analysis.
original publication in this journal is cited, in
accordance with accepted academic practice. Results: (1) There is a positive relationship between management equity incentives
No use, distribution or reproduction is and corporate tax avoidance which means, more the stock incentive offered to
permitted which does not comply with
these terms. executives, the more likely corporations are to pursue tax avoidance strategies
aggressively. (2) Internal control deficiencies enhance the positive relationship
between equity incentives and enterprise tax avoidance behavior. Therefore, in
Chinese enterprises, the lack of an internal control system and the failure of
internal control measures are prevalent, and such loopholes can intensify the tax
avoidance behavior that arises when executives are subject to equity incentives. (3)
The influence of management equity incentives on enterprise tax avoidance behavior
is greater in state-owned (SOE) than private enterprises. State-owned enterprises
are more likely to increase enterprise tax avoidance behavior when management is
subject to equity incentives for reasons such as strict performance requirements,
lower regulatory oversight, and less interference from negative information.
Finally, our findings have significant implications for policymakers/regulators, public
companies, investors, standard setters, managerial labor markets, and the welfare of
the overall economy.

KEYWORDS

enterprise tax avoidance, management equity incentive, ownership type, internal controls,
state-owned enterprise (SOE)

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1. Introduction of equity incentives of listed companies. Simultaneously, most

international researchers examine relevant problems using data from
China’s socialist market economic system has improved since publicly traded corporations in Europe and the United States, most
reform and opening up, and the current taxation system has been of which are privately held. Therefore, most foreign scholars do
steadily applied in depth. Taxation has promoted the modernization not consider the influence of company ownership when studying
of China and the improvement of comprehensive national power the link between management equity incentives and corporate tax
and plays an irreplaceable and huge role in today’s society. Since the avoidance. State-owned firms account for a major part of listed
corporate income tax in China reached RMB 4.2 trillion in 2021, companies in China, and diverse ownership will result in various
it is a substantial source of tax revenue.1 The Chinese government business models and attitudes, altering managers’ decision-making
has also implemented many enterprises taxation changes since 1979, behavior (Richardson et al., 2016; Li et al., 2017; Wang et al., 2021).
which required major SOE 55%, small SOEs 10–55% and private The empirical investigation of the impact of management equity
incentives on corporate tax avoidance is of great theoretical value in
corporations’ 35% income taxes (Cai and Liu, 2009). However,
this work, considering China’s current situation.
taxation will directly lead to the reduction of taxpayers’ wealth, and
Compared with developed countries, China only started the pilot
because China’s taxation law system is improving and the intensity of
practice of equity incentive since the late 1990s, and only started
supervision is getting higher, tax evasion has a high risk, which makes
to apply equity incentive in listed companies since 2005 when the
taxpayers start to worry whether they will be punished by taxation
share split reform was promoted, so the equity incentive started
authorities and turn to tax avoidance2 to reduce their tax burden. The
late, and the proportion is small. The study of the managerial
significance of corporate tax as a source of tax collection has therefore
equity incentive of listed firms in China is crucial for developing
sparked worries about corporate tax avoidance due to its financial
tax avoidance theory and enhancing corporate governance. It is
effect. Many countries’ public budgets have dropped as a consequence
emphasized that the study of corporate tax avoidance from the
of a substantial rise in corporate tax avoidance during the previous
perspective of management equity incentive is conducive to the
decade. An estimated US$500–650 billion worldwide is lost to tax
continuous standardization of incentive system and unreasonable
avoidance every year, with low- and lower-middle-income nations
incentives, reasonable tax planning and maximization of benefits.
accounting for one-third of the total. According to Dyreng et al.
At the same time, it provides more reference materials for the tax
(2017), corporate tax avoidance has sharply grown during the last
supervision of China’s administrative organs, hoping to improve
25 years. According to Forbes (2017), the annual cost of tax evasion
the efficiency of taxation supervision and management of China’s
in the United States is projected to be over $200 billion. Almost
taxation agencies, and the symptoms of taxation loss can be alleviated.
73% of Fortune 500 corporations have one or more subsidiaries
The decision to avoid taxes is influenced by moral hazard, tax-
in nations that are tax havens.3 Government revenue is severely
planning expenses, and the possibility to boost earnings. On the
imbalanced as a result of these tax tactics. In recent years, Chinese
other hand, internal control is a crucial tool for mitigating risk
enterprises’ tax avoidance activities have become more intense. On
and preventing corruption (Gong et al., 2021; Wang et al., 2022),
the other hand, the law enforcement of taxation authorities in the
and strong internal control enhances the compliance and efficacy
collection and management work objectively provides conditions
of operations. However, internal control also refers to middle-level
for enterprises to avoid taxation. According to data from the State
management control, bottom-level operational control, and top-level
Administration of Taxation, anti-tax avoidance in China generated internal governance. The internal control system’s overall design is
just RMB 460 million in tax income in 2005, but in 2015, anti-tax the responsibility of the board of directors, and its execution is the
avoidance contributed RMB 58 billion in tax revenue, a 126-fold responsibility of executives and other staff members. Government
increase in 10 years. The above information reflects the success of agencies in China support the internal control system of listed firms,
domestic anti-tax avoidance work and the current prevalence and and the system is effectively developed; nonetheless, the outcome
severity of tax avoidance in China. is unsatisfactory (Zhang et al., 2020). Executives and staff members
Management incentives are an important topic for research are human resources that must be inspired to execute internal
on corporate governance. Currently, the corporate governance controls. Some researchers have conducted comparative studies,
environment in China is not sound enough, leading to serious agency such as Henry et al. (2011) found that increasing executive salary
problems between owners and managers of many companies and can increase the efficacy of internal control. According to Balsam
even the corrupt behavior of individual executives pursuing personal et al. (2014), applying management equity incentives improves the
interests while ignoring owners’ interests. Although there has been quality of internal control. Guo et al. (2016) discovered that cash
a lot of study on the influence of managerial incentives on corporate profit sharing, union relations rules, retirement benefits, employee
governance in the academic community, there has been little research ownership and engagement and health and safety initiatives had a
on the impact of tax avoidance (Desai and Dharmapala, 2006; Rego substantial influence on the quality of internal controls. According to
and Wilson, 2012; Armstrong et al., 2015; Khan et al., 2017, Khan Zhang et al. (2020), the strength of non-executive equity incentives
et al., 2019). The research on this issue can make up for the lack can lower the risk of internal control vulnerabilities while also
of research on tax-related issues of management equity incentives improving internal control efficacy.
and provide theoretical guidance to further improve the management Therefore, our findings contribute to the literature on executive
compensation incentives, internal control deficiencies, and corporate
tax avoidance. The main findings are as follows; we empirically
1 https://www.chyxx.com analyze the relationship between management equity incentive and
2 Tax avoidance is defined as engaging in transactions and behaviors that corporate tax avoidance by using Chinese A-share listed companies
reduce a firm’s tax burden (Dyreng et al., 2008).
from 2016 to 2020. The results show that (1) There is a positive
3 For instance, a study from 2013 discloses that tech giant Apple utilized
legal sleights to evade paying billions of dollars in U.S. taxes on $44 billion in association between management equity incentive and enterprise
overseas profits over the previous 4 years. tax avoidance behavior consistent with prior studies (Phillips, 2003;

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Robinson et al., 2010; Rego and Wilson, 2012; Gaertner, 2014; Powers various insurmountable problems and loopholes still exist, and these
et al., 2016; Khan et al., 2019); the more the stock incentive offered to loopholes become the natural conditions for enterprises to carry
executives, the more likely corporations are to pursue tax avoidance out tax avoidance (Crocker and Slemrod, 2005). However, although
strategies aggressively. (2) Internal control deficiencies enhance the aggressive tax avoidance can reduce the tax burden of enterprises, it
positive relationship between equity incentive and enterprise tax will not only erode our tax revenue and affect the regulatory role of
avoidance behavior. Therefore, in Chinese enterprises, the lack national taxation, but also enhance the legal risk of enterprises (Chen
of an internal control system and the failure of internal control et al., 2020). As the reform of the taxation and legal systems continues
measures are prevalent, and such loopholes can intensify the tax to deepen and the taxation supervision continues to increase, higher
avoidance behavior that arises when executives are subject to equity requirements are put forward for enterprises’ risk control ability in
incentive. (3) The influence of management equity incentive on taxation. Moreover, in some radical tax avoidance process, it is often
enterprise tax avoidance behavior is greater in state-owned firms difficult for some enterprises to avoid touching the bottom line of the
than in private enterprises. State-owned enterprises are more likely law, making it difficult to control the enterprise’s tax avoidance risk
to increase enterprise tax avoidance behavior when management is (Sun and Wang, 2018).
subject to equity incentive for reasons such as strict performance Equity incentive can link company performance with corporate
requirements, lower regulatory oversight, and less interference from personal wealth because the agency theory can enhance the
negative information. consistency of the interests of managers and shareholders and
The remaining sections of the study are structured as follows: reduce the agency conflict between the two (Wang and Yao,
section “2. Literature review and hypothesis development” 2021). How exactly equity incentive specifically affects corporate
comprehensively reviews the relevant literature and development tax management? Some scholars argue that the higher the equity
of the hypothesis, while section “3. Methodology” elaborates on incentive of executives, the stronger their willingness to avoid taxes
the methodology, which includes primary data collection sources (Liu et al., 2010). Lv and Li (2012) argues that on this basis, this
and the definition of the variables, model construction of the study. effect will be significantly weakened if there is a greater external risk.
Section “4. Empirical analysis” determines the empirical results based However, some scholars’ studies have also come up with different
on regression analyses with various robustness tests. Section “5. results. Executive incentives are adversely connected with the degree
Conclusion and policy recommendations” provides the conclusion of company tax evasion, according to Chen and Tang (2012),
of the study with policy recommendations. and this relationship is particularly prominent in poorly managed
organizations. The poorer the quality of accounting information
disclosure, the bigger the company’s tax avoidance. The unfavorable
association between tax avoidance and the quality of accounting
2. Literature review and hypothesis information disclosure can be mitigated by increasing executives’
development remuneration. On the basis of Desai and Dharmapala (2006), because
the shelter of tax revenue and the potential tax avoidance income
The contemporary business system’s separation of ownership and of managers are complimentary, raising the level of equity incentive
management can lead to a conflict of interest between the owner may lower the amount of tax avoidance. Further studies, adding tax
and the actual operator, thus creating a principal-agent relationship rate volatility, Armstrong et al. (2015) find a positive correlation
problem (Wang and Yao, 2021). At this time, the owner, in order between compensation for equity incentive and tax activism, while
to make himself obtain greater benefits and increase the value of Peng (2017) finds that tax rate volatility results in a U-shaped
his company, usually takes appropriate measures to motivate the relationship between equity incentive and corporate tax avoidance.
manager so that the two are in the same direction of interests, and In addition, differentiating the nature of ownership, it is found that
then motivates the manager to use effective tax avoidance measures to state-controlled enterprises reduce corporate tax avoidance while
obtain greater benefits for the company. In other words, the incentive privately held and foreign-owned enterprises increase corporate tax
for executives becomes an important tool to reduce the conflict avoidance when managerial incentive compensation is increased
between the two (Liu et al., 2010). As a tool to make the interests of (Zhou and Hu, 2021).
management and owners converge, equity incentive can alleviate the Therefore, how can we restrain corporate tax avoidance and
conflict of interests caused by the separation of powers and reduce regulate corporate tax behavior? Under the modern enterprise
agency costs (Dyreng et al., 2010). system, executives often become the core of corporate tax avoidance
Tax is one of the important components of enterprise cost, which decisions. Then, it is essential to incorporate the study of corporate
directly leads to cash flow outflow (Huang et al., 2018). The level tax avoidance behavior into the framework of the principal-agent
of tax burden of enterprises is also related to the competitiveness problem between owners and management. Desai and Dharmapala
of enterprise industry, so in order to reduce enterprise cost, (2006) show that a higher equity incentive helps to align the
improve enterprise cash flow and enhance enterprise competitiveness incentives of principals, and as the share of managerial equity
enterprises are likely to carry out tax avoidance (Hanlon and incentive increases, the incentive is more likely to be higher.
Heitzman, 2010). Tax planning (or optimization) is one of the As the share of management equity incentive increases, it makes
necessary tools to ensure that the enterprise can survive in the fierce management more inclined to work to maximize the interests of all
market competition (Palan, 2020), and in China, the accounting shareholders through financial arrangements to save tax burden (Liu
system design is not consistent with the provisions of tax law. That et al., 2010). At the same time, the agency view of tax avoidance
is to say, enterprises can achieve surplus management by adjusting thinks that tax avoidance tends to deepen the firm’s internal and
non-taxable items to reduce corporate taxes without affecting their external information asymmetry, which affects the firm’s value (Desai
accounting revenue (Henry, 2018; Balakrishnan et al., 2019). In and Dharmapala, 2006). The degree of tax avoidance of the firm is
addition, in the specific tax operation practice, the existing tax significantly and positively related to inefficient investment, and tax
legal provisions and the legal system itself are not perfect, and avoidance reduces the efficiency of the firm’s investment (Sun and

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Wang, 2018; Hasan et al., 2022). That is to say, tax avoidance may can lower the risk of internal control vulnerabilities while also
increase the business risks faced by enterprises on the one hand and improving internal control efficacy. Although the senior management
may also negatively affect enterprises’ investment efficiency and value. makes the tax avoidance decision of the enterprise, it cannot do
At present, a large proportion of listed companies in some everything personally in the implementation process and requires the
developed countries have adopted the management equity cooperation of all departments within the enterprise to carry out the
incentive approach. Incentives to management provide long- whole process of production and operation, which results in internal
term incentives to improve performance by creating a corresponding coordination costs. If the internal control fails, it will cause the tax
link between higher pay performance sensitivity and lower taxes avoidance behavior of the enterprise to deviate from the expected goal
(Minnick and Noga, 2010). However, equity incentive, as a system (Zhang, 2021).
of share-based compensation, is bound to impact corporate tax According to the report of “2018 White Paper on Internal Control
liabilities and corporate net income and shareholder interests (Lu of Chinese Listed Companies” by DIB Database, approximately 60%
and Yang, 2021). Management equity incentive affect management of listed companies’ internal control ratings in 2018 are concentrated
behavior, and tax avoidance activities are one of the management at the B level, suggesting that the general degree of internal control of
behaviors, i.e., management equity incentive affects corporate tax domestic listed companies is currently poor. In the internal control
avoidance decisions. Management is further driven to seek corporate evaluation report for the reporting period of 2017, 456 organizations
tax avoidance with the owners to maximize their benefits by receiving out of 34,875 listed corporations reported internal control violations
taxable equity benefits (Duru et al., 2012). Therefore, it is critical to (about 14% of the total number of enterprises in the internal control
investigate the relationship between equity incentive and corporate evaluation report, see Table 1 for details), compared with 512/2,864
tax evasion as a study issue. in 2016, the overall indicator data decreased, but the number of listed
companies in the category of “major and important internal control
deficiencies” has been raising yearly, and the percentage of “major
2.1. Research hypothesis and important internal control deficiencies” in 2017 has increased by
as much as 38% compared with the data in 2016.4
According to the incentive compatibility principle of principal- The number of serious internal control flaws has risen year
agent theory, if the management of a firm is to pursue the firm’s long- after year in recent years, indicating that there is still considerable
term interests as much as the owners, then it can only be motivated space for improvement in the quality of internal control in China’s
to have the expectation of long-term gains. According to Desai and publicly traded enterprises. Chinese government agencies support the
Dharmapala (2006), a higher incentive level encourages proprietors, internal control system of listed firms, and the system is effectively
agents, and managers to be more radical in improving the firm’s developed; nonetheless, the outcome is unsatisfactory (Zhang et al.,
profitability through tax avoidance. Managerial incentives, especially 2020). In other words, most Chinese listed businesses’ internal
control mechanisms are now insufficient, which leads to the second
equity incentive, are the more important management system in
hypothesis of this research.
modern management. In business, there may be agency problems
between owners and operators due to the uneven distribution of
benefits, which are often difficult to solve before equity incentive. The Hypothesis 2: Internal control plays an enhancing role in
equity incentive can make the manager get a certain number of shares the positive relationship between corporate executive equity
of the company, so that the company’s development is closely related incentive on the degree of corporate tax avoidance.
to the manager’s interests, and the manager and the owner can reach
a certain degree of consensus. Thus, after the managers receive the In 2008, SASAC and the Ministry of Finance issued a notice on
equity incentive, they can likely arrange tax avoidance measures to regulating the implementation of the equity incentive system in state-
achieve the purpose of tax savings and increase corporate income. It controlled listed companies, in which they once again emphasized
leads to the first hypothesis of this paper: the setting of performance targets and proposed that in the
implementation of equity incentive in state-owned listed companies,
Hypothesis 1: There is a positive link between management performance targets should be set for both granting and exercising,
equity incentives and corporate tax avoidance. and the performance targets should be set with the performance
targets should be set in a forward-looking and challenging manner,
Among the many corporate governance factors, there are more and the completion of the performance evaluation index should
and more factors that can have an impact on tax risk. Internal be the condition for the implementation of the equity incentive.
control, as one of the corporate governance mechanisms, plays an The stricter performance target setting makes enterprises have
irreplaceable role in corporate activities when uncertainties caused more incentives to adopt tax avoidance and other behaviors to
by macro and micro factors of corporate operations increase. Its meet the conditions of exercising or unlocking (Zhang et al.,
main objectives are to provide reasonable assurance for the safety 2019). Meanwhile, the lack of supervision caused by the unique
of corporate assets, to supervise the production and operation ownership structure of state-owned holding companies and the
management in compliance with legal regulations, to ensure the absence of owners may result in a decline in company internal
truthfulness and completeness of financial reporting information control, resulting in a drop-in company supervision, making state-
disclosure, and to effectively improve the quality and efficiency of owned enterprises less transparent than private enterprises and
operation (Zhang, 2020). Henry et al. (2011) found that increasing making high tubes more likely to choose to increase tax avoidance
executive package compensation can increase the efficacy of internal
control. Balsam et al. (2014) reported that applying management
4 China Securities Net. White Paper on Internal Control of Listed Companies
equity incentives improves the quality of internal control. According in China 2018 [EB/OL]. http://news.cnstock.com/news,yw-201807-4251023.
to Zhang et al. (2020), the strength of non-executive equity incentives htm,2018-07-26.

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TABLE 1 Analysis of the status of disclosure of internal control deficiencies in listed companies.

Defect levels Number of listed companies Percentage of total Number of defects Defect percentage
disclosing deficiencies reporting companies5
Major defects 65 2.016% 141 3.177%

Important defects 53 1.643% 85 1.915%

General defects 374 11.597% 4,212 94.908%

Total 4566 14.140% 4,438 100%

5 A total of 3,225 listed companies disclosed their annual internal control evaluation reports during the 2017 reporting period.
6 Thereason why the total number of the three defect companies is greater than the total number of disclosure companies 456 is that some enterprises disclose more than one defect level of internal
control defect information.

through equity incentive (Wang et al., 2006; Li et al., 2017), thus with negative or zero accounting profit before tax. (3) Excluding the
providing more convenience for the management to implement tax current income tax expense is negative or zero; the actual tax rate
avoidance behaviors. Through the tax avoidance by the management ETR is greater than 1 or less than 0 and cannot accurately obtain
of state-owned enterprises, more cash flow is retained in the the taxable income amount. (4) Excluding companies with missing
enterprise, which increases the after-tax profits of the enterprise and financial data. Finally, after screening, 3,341 A-share listed companies
facilitates executives to accomplish the performance goals set in the are obtained, with a total of 12,274 observation samples. All data
equity incentive contracts (Zhang et al., 2019). Compared with state- analysis was performed by using Stata 16 statistical software.
controlled enterprises, private enterprises on the one hand have more
flexibility in setting their performance targets, which can reduce the
degree of corporate tax avoidance to a certain extent. On the other 3.2. Variables
hand, for private firms, especially family firms where family members
assume the role of managers, executives and firms generally have the 3.2.1. Explained variable
same goals. Therefore, executives will focus more on maximizing the In this study, the current effective tax rate ETR is used as (Xie
value of the enterprise, thus reducing their motivation to adopt tax et al., 2023) an indicator of the corporate tax burden, and the effect of
avoidance and rent-seeking (Luo and Zeng, 2018). total corporate income tax expense and deferred income tax expense
In addition, SOEs and private firms react differently to negative on the current effective tax rate is also considered:
information. For an enterprise, paying taxes can enhance its social Income tax expense − deferred income tax expense
image, while tax avoidance has more or less negative effects on the ETR = (1)
Accounting profit before tax
enterprise. SOEs are guaranteed by the reputation of the state and
local government, while private enterprises are fully involved in the Where deferred income tax expense = (Deferred income tax liabilities
market competition and generally have a higher sense of crisis when at the end of the period-deferred income tax liabilities at the
there is negative news (Jie and Lihong, 2017). From the principal- beginning of period)-(Deferred income tax assets at the end of the
agent perspective, private enterprises will be more strictly supervised period-deferred income tax assets at the beginning of period).
by owners compared to state-owned enterprises, and executives may Considering that our government gives certain preferential
refrain from intervening in tax avoidance to reduce the generation of policies to some enterprises in terms of applicable tax rates in order to
negative information due to their own interests (Zhang et al., 2019). support the development of certain enterprises, industries, or regions,
As a result, the third hypothesis of this paper is introduced. which leads to differences in the corporate income tax rates applied
by enterprises, which will have an impact on the measurement
Hypothesis 3: Subject to other conditions, the nature of of corporate tax avoidance, the difference between the nominal
ownership of private enterprises has a weakening effect in the corporate tax rate and its effective tax rate is used to measure the
degree of influence of executive equity incentive on corporate tax degree of corporate tax avoidance (Li et al., 2016; Tang et al., 2022).
avoidance relative to state-controlled enterprises. This method can better solve the situation that different enterprises
apply different income tax rates. It is also more accurate than the
effective tax rate method to measure the degree of corporate tax
avoidance, and this paper also applies Li et al. (2016) approach:
The degree of corporate tax avoidance (TME) = nominal
3. Methodology corporate tax rate (RATE)-current effective tax rate (ETR).
The greater the difference between the nominal tax rate and
3.1. Sample and data source its effective tax rate, the greater the degree of tax avoidance
of the enterprise.
The study sample for this paper is A-share companies listed in
China from 2016 to 2020 and the necessary data is gathered from 3.2.2. Explanatory variables
the CSMAR database, and the raw data are processed as follows: For measuring the level of management equity incentive,
(1) ST companies and ST∗ companies are excluded. The reason domestic research in China mainly selects the ratio of management
is that ST companies and ST∗ companies have abnormal financial shareholding to total company equity as a proxy variable for the
data in the sample observation period, which may cause extreme level of management equity incentive directly. One way to evaluate
values and affect the empirical analysis. (2) Excluding companies the amount of executive stock options in foreign countries is the

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TABLE 2 Variable definition.

Variable type Symbol Variable Measurement indicator

Explained variable TME The extent of corporate tax avoidance Nominal corporate tax rate—current effective corporate tax rate

Explanatory MRS Management equity incentive (Number of shares held by executives × stock price × 1%)/(Total compensation of the top three
variables highest paid executives + number of shares held by executives × stock price × 1%)

Moderator variable IC Internal control effectiveness DIB internal control index /1,000

Control variables SIZE Enterprise size The natural logarithm of the total assets at the end of the period is taken

GROWTH Business growth capability (Current period main business income -last period main business income)/last period main
business income

NDTS Non-interest tax shield (Accumulated depreciation of fixed assets + accumulated amortization of intangible assets)/ Total
assets at the end of the period

TQ Enterprise value Enterprise market value/asset replacement cost

TOP1 Shareholding ratio of the largest shareholder Number of shares held by the largest shareholder/Total number of shares at year-end

DUAL Two jobs at once If the chairman and general manager are the same person, the value is 1; otherwise, the value is 0

AGE Enterprise age The company’s listing years take the natural logarithm

change in the value of executive stock and option when the share in 2011 and is jointly researched by Shenzhen DIB Company and
price of a company changes by 1%; the other is the change in Xiamen University, which has a certain authority. This index is based
the value of management stock and options when the value of the on the five elements of internal control, which can more objectively
company changes by $1. and comprehensively evaluate the effectiveness of the internal control
The company’s stock held by senior executives is the main system of various enterprises, applies to enterprises in different
manifestation of executive equity incentive, and senior executives regions and industries, and can fully ensure the comparability
can benefit from the stock held by senior executives. Compared with between enterprises and themselves. The DIB, internal control index
directly using the proportion of the number of senior executives in is used in this thesis to assess the efficacy of business internal control.
the total shares of the company to measure the degree of executive In general, the DIB internal control index ranges from 0 to 1,000. The
equity incentive, The index of the share of earnings from holding higher the index, the greater the quality of the enterprise’s internal
stocks in the total compensation structure of the executive can control, and an index of 0 indicates the existence of major internal
well measure the importance of equity incentive for the executive. control flaws. In order to balance the numerical volume with other
Considering that equity incentive plans implemented by listed indicators and make the data results more accurate, the index is
companies in China mainly announce the number of shares held divided by 1,000; when the higher the index indicates, the better the
by executives, this paper intends to learn from the methods of quality of internal control.
Desai and Dharmapala (2006), and from the perspective of executive
compensation structure, compared with fixed compensation, the 3.2.4. Control variables
degree of equity incentive can be measured by whether equity The thesis draws on the model design of previous research on tax
incentive compensation has a significant incentive effect on senior avoidance and selects the control variables that may affect corporate
executives. Based on the availability of data, the total compensation tax avoidance behavior as follows: enterprise size, enterprise growth
of the top three highest-paid executives was used to represent the capacity, non-interest tax shield, enterprise value, the shareholding
executive compensation indicator. Among them, the management ratio of the largest shareholder, enterprise age, while considering that
equity incentive is measured as part of the total compensation scholars’ research results on corporate governance affect corporate
(excluding in-service expenses) and recorded as MRS, which is tax avoidance decisions, holding both the positions of chairman
calculated as follows: and managing director is also a control variable. The definition of
variables is shown in Table 2.
In order to undertake a thorough investigation of the link
Management equity incentive (MRS) (2) between management equity incentive and corporate tax avoidance,
this paper draws on previous research methods. It mainly adopts
Number of shares held by executives
normative analysis and empirical research methods to conduct a
× stock price × 1% theoretical and empirical study on the research topic.
=
(Total compensation of the top three highest paid executives To begin, the normative analysis method entails gathering,
+ number of shares held by executives x stock price x 1%) collating, analyzing, and researching existing literature on the impact
of corporate tax avoidance and equity incentive on corporate tax
A larger MRS calculated represents a higher degree of equity avoidance, as well as conducting a theoretical analysis of the
incentive for executives. relationship between executive shareholding and the degree of
corporate tax avoidance to establish the theoretical foundation for the
3.2.3. Moderating variables study. This analysis is a prerequisite for empirical research.
The prerequisite for quantifying internal control’s effectiveness Furthermore, using the empirical research approach, the
is clarifying the corresponding evaluation criteria. This paper selects hypothesis of the link between management equity incentive and
DIB internal control index to measure. This index was first released corporate tax avoidance is provided, based on existing literature,

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TABLE 3 Descriptive statistics and correlation matrix.

Panel A: Descriptive statistics of main variables

Variable N Mean S.D. Med Min Max
TME 12,274 −0.024 0.186 0.001 −5.232 1.779

MRS 12,274 0.339 0.393 0.055 0.000 0.979

SIZE 12,274 22.39 1.311 22.221 20.05 26.39

GROWTH 12,274 0.200 0.415 0.120 −0.466 2.923

NDTS 12,274 0.021 0.014 0.019 0.001 0.065

TQ 2,274 2.008 1.763 1.580 0.690 92.25

TOP1 12,274 0.339 0.145 0.320 0.029 0.891

DUAL 12,274 0.291 0.454 0.000 0.000 1.000

AGE l12,274 2.173 0.815 2.303 0.000 3.434

IC 12,274 0.641 0.130 0.666 0.000 0.941

SOE 12,274 0.357 0.479 0.000 0.000 1.000

Panel B: Descriptive statistics of enterprises with different ownership types

State-owned enterprises Private enterprises
Variable N Mean S.D. N Mean S.D.
TME 3,988 −0.034 0.225 8,286 −0.019 0.164

MRS 3,988 0.048 0.157 8,286 0.479 0.395

SIZE 3,988 23.090 1.398 8,286 22.05 1.121

GROWTH 3,988 0.151 0.395 8,286 0.223 0.423

NDTS 3,988 0.024 0.015 8,286 0.020 0.013

TQ 3,988 1.718 1.471 8,286 2.147 1.872

TOP1 3,988 0.389 0.148 8,286 0.316 0.138

DUAL 3,988 0.093 0.291 8,286 0.386 0.487

AGE 3,981 2.649 0.660 8,188 1.696 0.936

Panel C: Pearson correlation coefficient matrix

TME MRS SIZE GROWTH NDTS TQ TOP1 DUAL AGE
TME 1

MRS 0.016 1

SIZE −0.031*** −0.231*** 1

GROWTH 0.031*** 0.083*** 0.055*** 1

NDTS 0.034*** −0.115*** −0.01 −0.074*** 1

TQ 0.048*** −0.020* −0.216*** 0.035*** 0.005 1

TOP1 0.009 −0.102*** 0.003 −0.022** 0.040*** −0.020* 1

DUAL 0.029*** 0.112*** −0.111*** 0.025** −0.042*** 0.058*** 0.068*** 1

AGE −0.040*** −0.377*** 0.470*** −0.020* 0.067*** 0.00300 −0.198*** −0.151*** 1

*p < 0.1, **p < 0.05, ***p < 0.01.

under the premise that the real situation of listed businesses in avoidance derived from the aforementioned theoretical analysis: The
China is completely integrated. Using the relevant data of China’s relationship between the influence of management equity incentive
A-share listed enterprises from 2016 to 2020 as the sample, descriptive on corporate tax avoidance behavior and firms with different
statistics, correlation tests, and regression analysis are conducted ownership nature; Hypothesis 1 is tested by covering all samples.
using Stata software to verify whether the hypothesis is correct and When hypothesis 3 is tested, state-controlled enterprises and private
the robustness test is performed. Finally, the research conclusion enterprises are included in the model separately to compare the
is drawn, and recommendations are made. In other words, a relationship.
quantitative analysis was conducted on the relationship between
TMEit = β0 + β1 MRSit + β2 SIZEit + β3 GROWTH it + β4 NDTSit
management equity incentive and corporate tax avoidance.
The following empirical models are created to evaluate
the link between executive equity incentive and corporate tax +β5 TQit + β6 TOP1it + β7 DUALit + β8 AGEit + εi,t (3)

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TABLE 4 Regression results of the effect of executive equity incentive on TABLE 4 (Continued)
corporate tax avoidance.
Variable (1) (2) (3)
Variable (1) (2) (3)
TME TME TME
TME TME TME
Company Yes Yes Yes
Panel A: Controlling for time effects only
N 12,274 12,274 12,274
MRS 0.017*** 0.013*** 0.011**
r2 0.005 0.009 0.009
(3.99) (2.72) (2.12)
F 8.172 8.661 6.572
SIZE −0.004*** −0.004***
The t-statistics in parentheses, *p < 0.1, **p < 0.05, ***p < 0.01.
(-3.11) (-2.61)

GROWTH 0.017*** 0.017*** The effect of internal control in management equity incentive
(4.27) (4.24) on corporate tax avoidance behavior; according to hypothesis 2,
the internal control variable and the cross term are added to
NDTS 0.721*** 0.715***
model 3.
(5.93) (5.82)

TQ 0.006*** 0.006***
TMEit = β0 + β1 MRSit + β2 ICit + β3 MRS ∗ ICit + β4 SIZEit
(6.28) (6.38)

TOP1 0.023*

(1.85)
+β5 GROWTH it + β6 NDTSit + β7 TQit + β8 TOP1it

DUAL 0.000

(0.07) +β9 DUALit + β10 AGEit + εi,t (4)

AGE −0.002

(-1.04)
4. Empirical analysis
Constant −0.055*** 0.010 −0.000

(-12.57) (0.29) (-0.01) 4.1. Descriptive statistics and correlation

Year Yes Yes Yes matrix
N 12,274 12,274 12,274

r2 0.007 0.016 0.016 The descriptive statistics of the main variables shown in Table 3A
indicate that enterprise size (SIZE) and enterprise value (TQ) are
F 16.122 21.915 16.740
relatively large, while the fluctuations of the statistical indicators of
Panel B: Controlling for time and individual effects the remaining variables are relatively small and within a reasonable
MRS 0.029*** 0.026** 0.024** range. The mean value of corporate tax avoidance (TME) is -
(2.67) (2.41) (2.14)
0.024, and the standard deviation is 0.186, which indicates that tax
avoidance is common among the listed companies in China’s A-share
SIZE −0.027*** −0.026***
sector. The maximum value of management equity incentive (MRS)
(-3.60) (-3.40) is 0.979, and the minimum value is close to 0, which is 0.000001,
GROWTH 0.020*** 0.020*** indicating that the degree of implementing equity incentive plan
(4.46) (4.47)
varies greatly among different listed companies in China, and there
are companies in the observed sample that completely use equity
NDTS −1.205*** −1.179***
incentive as the full compensation for executives, and there are
(-3.45) (-3.31) also companies that do not implement equity incentive plan at all,
TQ 0.002 0.002 indicating that there are huge differences in different companies’.
(1.11) (1.23)
This indicates that there is a huge difference in the attitudes and
perceptions of different companies toward equity incentive. The
TOP1 −0.001
maximum and minimum values of internal control effectiveness (IC)
(-0.02) of enterprises are 0.941 and 0.00, respectively, indicating that the
DUAL 0.003 effectiveness of the implementation of internal control system varies
(0.41)
among enterprises; the standard deviation is 0.130, explaining that
there are differences in the effectiveness of the internal control system
AGE −0.004
of enterprises. The mean value of SOE is 0.357, which indicates that
(-0.50) the proportion of private enterprises in the study sample is about
Constant −0.053*** 0.553*** 0.552*** two-thirds, while the proportion of state-owned enterprises is about
one-third, which is consistent with the actual situation in China.
(-9.21) (3.34) (3.26)
Further, Table 3B shows the descriptive statistics of the main
Year Yes Yes Yes
variables of enterprises with different ownership types. The average
(Continued) value of the corporate tax avoidance (TME) of state-owned

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TABLE 5 The effect of internal control on the relationship between TABLE 6 Regression results of ownership nature grouping.
executive equity incentive and corporate tax avoidance.
State-owned enterprises (SOE) Private enterprises
Variable (1) (2) (3) (4) (5)
TME TME TME TME
TME TME TME TME TME
MRS 0.099* 0.103* 0.013 0.013
MRS 0.011** 0.005 0.009 0.020* 0.020*
(1.69) (1.72) (1.18) (1.10)
(2.47) (0.86) (1.63) (1.78) (1.75)
SIZE −0.034* −0.021**
IC 0.113*** 0.124*** 0.125*** 0.106*** 0.104***
(-1.94) (-2.22)
(7.69) (8.27) (8.32) (5.28) (5.16)
GROWTH 0.017* 0.018***
MRS*IC 0.156*** 0.135*** 0.133*** 0.130** 0.123**
(1.85) (3.41)
(3.74) (3.23) (3.18) (2.44) (2.30)
NDTS −1.139* −1.426***
SIZE −0.006*** −0.006*** −0.015** −0.029***
(-1.66) (-3.21)
(-4.02) (-4.04) (-2.07) (-3.73)
TQ 0.003 0.003
GROWTH 0.012*** 0.016*** 0.013*** 0.018***
(0.79) (1.46)
(3.03) (3.96) (2.90) (3.97)
TOP1 −0.144* 0.068
NDTS 0.774*** 0.780*** −1.023*** −1.071***
(-1.69) (1.04)
(6.34) (6.41) (-2.90) (-3.04)
DUAL −0.009 −0.001
TQ 0.005*** 0.006*** −0.000 0.001
(-0.58) (-0.10)
(5.47) (6.05) (-0.31) (0.96)
AGE 0.020 −0.003
TOP1 0.014 0.019 −0.024 −0.008
(0.51) (-0.24)
(1.17) (1.54) (-0.53) (-0.17)
Constant −0.073*** 0.736* −0.036*** 0.424**
DUAL 0.002 0.000 0.002 0.003
(-9.36) (1.81) (-4.27) (2.02)
(0.55) (0.05) (0.34) (0.47)
Year Yes Yes Yes Yes
AGE −0.000 0.000 0.041*** −0.005
Company Yes Yes Yes Yes
(-0.15) (0.09) (4.24) (-0.38)
N 3988.000 3988.000 7189.000 7189.000
Constant −0.024*** 0.084** 0.050 0.259* 0.615***
r2 0.013 0.017 0.002 0.007
(-14.35) (2.46) (1.46) (1.65) (3.67)
F 7.418 4.248 1.544 2.857
Year No No Yes No Yes
The t-statistics in parentheses, *p < 0.1, **p < 0.05, ***p < 0.01.
Company No No No Yes Yes

N 12,274 12,274 12,274 12,274 12,274

4.2. Regression analysis
r2 0.006 0.015 0.022 0.007 0.012

F 23.461 18.823 19.628 6.184 7.550 4.2.1. Relationship between executive equity
The t-statistics in parentheses, *p < 0.1, **p < 0.05, ***p < 0.01. incentive and corporate tax avoidance
Table 4A shows the regression results of the effect of executive
equity incentive on corporate tax avoidance when only the time
enterprises is -0.034 while corporate tax avoidance (TME) of private effect is controlled. It is easy to spot that: (1) the regression
enterprises is -0.019, indicating that overall, the degree of tax coefficient of management equity incentive (MRS) and corporate
avoidance of state-owned enterprises is lower than the degree of tax tax avoidance (TME) is 0.017 without control variables, and it is
avoidance of private enterprises. The mean value of management significant at the 1% level, indicating that the degree of executive
equity incentive (MRS) is 0.048 for SOEs and 0.479 for private firms, equity incentive has a greater impact on corporate tax avoidance.
indicating that the degree of equity incentive for executives is higher After adding the control variables, the sign of the regression
in private firms than in SOEs. coefficient between executive equity incentive and corporate tax
Table 3C shows that the correlation coefficients among variables avoidance is always positive and remains significant at least at the
are either low or very weak and significant. From the sign of 5% level, thus it is inferred that there is a positive relationship
correlation coefficients among variables, the degree of corporate between executive equity incentive and corporate tax avoidance,
tax avoidance is positively correlated with the degree of executive which verified Hypothesis 1 and consistent with prior studies
equity incentive, which initially verifies the hypothesis of this (Phillips, 2003; Robinson et al., 2010; Rego and Wilson, 2012;
paper. The correlation between enterprise size (SIZE), enterprise Gaertner, 2014; Powers et al., 2016; Khan et al., 2019; Zhou and Hu,
age (AGE), and tax avoidance is negative, while the correlation 2021).
between enterprise growth capacity (GROWTH), non-interest tax Table 4B indicates the regression outcomes while controlling
shield (NDTS), enterprise value (TQ), the shareholding ratio of top for the time and individual effects. From the regression results, it
shareholder (TOP1), and two jobs at once (DUAL) and tax avoidance can be concluded that without the control variables, controlling
is positive, which is essentially in line with the above inference. for the time and individual fixed effects, the relationship between

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TABLE 7 Robustness test results of the relationship between executive TABLE 8 Robustness test results of the moderating effect of
equity incentive and corporate tax avoidance. internal control.

(1) (2) (3) (4) (5) (1) (2) (3) (4) (5)
ETR ETR ETR ETR ETR ETR ETR ETR ETR ETR
MRS −0.062*** −0.030*** −0.035*** −0.028** −0.029*** MRS −0.058*** −0.026*** −0.031*** −0.025** −0.024**

(-14.41) (-5.70) (-6.56) (-2.49) (-2.59) (-13.46) (-4.96) (-5.85) (-2.23) (-2.18)

SIZE 0.010*** 0.010*** 0.013* 0.028*** IC −0.124*** −0.140*** −0.140*** −0.107*** −0.104***

(6.28) (6.32) (1.74) (3.63) (-8.36) (-9.28) (-9.35) (-5.34) (-5.21)

GROWTH −0.011*** −0.016*** −0.016*** −0.021*** MRS*IC −0.127*** −0.092** −0.089** −0.129** −0.124**

(-2.78) (-3.88) (-3.63) (-4.74) (-3.01) (-2.19) (-2.14) (-2.43) (-2.32)

NDTS −0.883*** −0.891*** 1.020*** 1.111*** SIZE 0.013*** 0.013*** 0.018** 0.030***

(-7.14) (-7.24) (2.88) (3.14) (7.95) (8.02) (2.46) (3.94)

TQ −0.006*** −0.007*** 0.000 −0.002 GROWTH −0.010** −0.015*** −0.014*** −0.019***

(-6.36) (-6.90) (0.01) (-1.14) (-2.54) (-3.65) (-3.26) (-4.23)

TOP1 0.013 0.008 0.030 0.009 NDTS −0.952*** −0.959*** 0.956*** 1.001***

(1.05) (0.62) (0.68) (0.19) (-7.78) (-7.87) (2.72) (2.85)

DUAL 0.001 0.003 −0.001 −0.002 TQ −0.006*** −0.007*** 0.000 −0.001

(0.22) (0.78) (-0.07) (-0.22) (-6.06) (-6.62) (0.29) (-0.86)

AGE 0.017*** 0.016*** −0.024*** 0.002 TOP1 0.019 0.014 0.030 0.016

(7.38) (7.11) (-3.42) (0.27) (1.56) (1.14) (0.68) (0.35)

Constant 0.232*** −0.004 0.034 −0.041 −0.398** DUAL 0.001 0.003 −0.001 −0.002

(103.60) (-0.11) (0.98) (-0.26) (-2.36) (0.25) (0.82) (-0.18) (-0.29)

Year No No Yes No Yes AGE 0.017*** 0.016*** −0.039*** 0.002

Company No No No Yes Yes (6.21) (5.96) (-4.12) (0.19)

N 12,274 12,274 12,274 12,274 12,274 _cons 0.212*** −0.080** −0.044 −0.136 −0.460***

r2 0.017 0.039 0.048 0.004 0.008 (124.52) (-2.34) (-1.28) (-0.87) (-2.76)

F 207.508 62.163 50.807 4.084 6.179 Year No No Yes No Yes

The t-statistics in parentheses, *p < 0.1, **p < 0.05, ***p < 0.01. Company No No No Yes Yes

N 12,274 12,274 12,274 12,274 12,274

the degree of management equity incentive (MRS) and the r2 0.022 0.047 0.056 0.007 0.011
degree of corporate tax avoidance (TME) is still positive and
F 93.278 60.749 51.779 6.359 7.236
significant at the 1% level is positively correlated with corporate
The t-statistics in parentheses, *p < 0.1, **p < 0.05, ***p < 0.01.
tax avoidance (TME), and the p-value of corporate tax avoidance
(TME) is less than 0.05, i.e., significant at the 5% level (in
line with Liu et al., 2010; Armstrong et al., 2015; Zhang et al., equity incentive and internal control index (MRS∗ IC) and the
2019). degree of corporate tax avoidance (TME) has a significant positive
relationship, which is significant at the 1% level. (3) Controlling
4.2.2. Effect of internal control on the relationship for time effects only, the regression coefficient of the interaction
between executive equity incentive and corporate term (MRS∗ IC) is 0.133 after adding the control variables, which
tax avoidance is positively correlated with the degree of corporate tax avoidance
Table 5 shows the results of the regression based on Model 2. (TME) and is significant at the 1% level (4) Controlling for individual
From the regression results, it can be shown that: (1) the coefficient effects, the regression coefficient of the interaction term (MRS∗ IC)
of the interaction term MRS∗ IC between corporate executive equity is 0.130 after adding the control variables, which is positively
incentive and the internal control index is 0.156 without controlling correlated with the degree of corporate tax avoidance (TME). (5)
for time and individual effects, and it is significant at the 1% level, After controlling for both individual and time-fixed effects, the
indicating that internal control plays an enhancing role in the positive regression coefficient of the interaction term (MRS∗ IC) is 0.123,
relationship between corporate executive equity incentive and the which is positively correlated with the degree of corporate tax
degree of corporate tax avoidance (TME); (2) without controlling for avoidance (TME), and is significant at the 5% level.
time and individual effects, there is a significant positive connection Overall, the coefficient of the interaction term MRS∗ IC between
between the interaction term MRS∗ IC and the degree of corporate corporate executives’ equity incentive and internal control index
tax avoidance (TME) after adding the control variables. (2) With is always positive and significant, indicating that internal control
the inclusion of control variables without controlling for time and enhances the positive relationship between corporate executive equity
individual effects, the interaction term between corporate executive incentive and the degree of corporate tax avoidance, which supports

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TABLE 9 Robustness test results of the effect of ownership type on the the previous hypothesis (i.e., consistent with Luo and Zeng, 2018;
relationship between executive equity incentive and corporate tax
avoidance.
Zhang et al., 2019).

(1) (2) (3) (4)

ETR ETR ETR ETR 4.3. Robustness test
MRS −0.097* −0.103* −0.016 −0.016

(-1.67) (-1.72) (-1.43) (-1.42)

4.3.1. Relationship between executive equity
incentive and corporate tax avoidance
SIZE 0.039** 0.022**
Table 7 displays the effects of the robustness test on the
(2.22) (2.33) relationship between management equity incentive and corporate
GROWTH −0.019** −0.019*** tax avoidance. According to the results, when the current effective
(-1.99) (-3.66) tax rate is being used as a proxy for corporate tax avoidance,
the degree of management equity incentive (MRS) and corporate
NDTS 1.044 1.361***
tax avoidance (ETR) are inversely correlated and significant at the
(1.53) (3.07) 1% level without controlling for the time and individual effects.
TQ −0.003 −0.004* The higher the degree of executive equity incentive, the lower the
(-0.82) (-1.69) effective tax rate and the higher the degree of tax avoidance. As
in the previous empirical study, the significance test reveals that
TOP1 0.148* −0.059
there is a positive correlation between the extent of management
(1.74) (-0.90) equity incentive and the degree of business tax avoidance (Rego
DUAL 0.012 0.001 and Wilson, 2012; Gaertner, 2014; Khan et al., 2019; Zhou and Hu,
(0.74) (0.10) 2021).

AGE −0.023 0.000

4.3.2. Moderating effect of internal control
(-0.57) (0.02)
The results of the robustness test on the effect of internal
_cons 0.281*** −0.631 0.210*** −0.266 control on the relationship between executive equity incentive and
(36.24) (-1.56) (25.14) (-1.27) corporate tax avoidance are shown in Table 8 and prove that, after
using the current effective tax rate as a proxy for the degree of
Year Yes Yes Yes Yes
corporate tax avoidance, the degree of management equity incentive
Company Yes Yes Yes Yes
(MRS) is negatively related to the degree of corporate tax avoidance
N 3988.000 3988.000 7189.000 7189.000 (ETR) without controlling for time and individual effects and is
r2 0.012 0.017 0.001 0.007 significant at the 1% level. Further, the interaction term (MRS∗ IC)
F 6.865 4.184 1.226 2.829
is also negatively correlated with corporate tax avoidance (ETR)
and is significant at the 5% level, indicating that internal control
The t-statistics in parentheses, *p < 0.1, **p < 0.05, ***p < 0.01.
enhances the relationship between the degree of management equity
incentive (MRS) and corporate tax avoidance (ETR); controlling
the previous hypothesis (in line with Henry et al., 2011; Balsam et al., for both time and individual effects, the interaction term between
2014; Zhang et al., 2020). the degree of equity incentive and internal control index (MRS∗ IC)
is negatively correlated and significant at the 5% level. As in the
4.2.3. Effect of different ownership types on the previous empirical study, the significance test again indicates that
relationship between executive equity incentive internal control has an enhanced effect on the relationship between
and corporate tax avoidance the degree of executive equity incentive and the degree of corporate
Heterogeneity grouping tests on the nature of equity will be tax avoidance.
conducted next to illustrate the effect of different ownership natures
of firms on the relationship between management equity incentive 4.3.3. Effect of ownership type
and corporate tax avoidance. Table 9 shows the regression results for different ownership
Table 6 shows the results of the grouped regressions derived types after using the current effective tax rate as a proxy
from the nature of ownership. From the regression results, it shows for corporate tax avoidance. Controlling for both time and
that: (1) In state-controlled enterprises, controlling for both time individual effects, the regression coefficient of management equity
and individual effects, the regression coefficient of management incentive (MRS) of state-controlled enterprises is -0.097, which
equity incentive (MRS) is 0.099, which is positively correlated with is negatively related with corporate tax avoidance (TME) and
corporate tax avoidance (TME) and is significant at the 10% level significant at the 10% level, while the regression coefficient of
(Zhang et al., 2019). After adding the control variables, the regression management equity incentive (MRS) of state-controlled enterprises
coefficient of management equity incentive (MRS) is 0.103, which is –0.103, which is negatively correlated with corporate tax
is positively correlated with corporate tax avoidance (TME) and is avoidance (TME) and significant at the 10% level after adding the
significant at the 10% level. (2) Controlling for time effects, there is no control variables.
significant correlation between management equity incentive (MRS) It demonstrates that the more the executive stock incentive, the
and corporate tax avoidance (TME) in private firms, and the same is lower the enterprise’s effective tax rate and the greater the degree
not significant after adding the control variables. It is consistent with of tax avoidance (consistent with Gaertner, 2014; Khan et al., 2019).

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In contrast, there is no significant correlation between management Moreover, for the issue of equity incentive of enterprises, the
equity incentive (MRS) and corporate tax avoidance (TME) in private shareholding ratio of management should be strictly controlled
firms, and the same is not relevant after adding control variables. The and the equity structure should be optimized so that it cannot
robustness of the article results is confirmed, as is the case with the only achieve the purpose of incentive and improve the long-
baseline regression results. term economic interests of enterprises, but also consider the
business risks brought by equity incentive to enterprises, reasonably
control the risks and pay attention to the equity checks and
5. Conclusion and policy balances of enterprises.

recommendations
The inconsistency of goals between shareholders and executives Data availability statement
leads to a conflict of interests in the context of the separation
of operation and ownership in modern enterprises and the The data supporting the conclusions of this article will be made
principal-agent relationship between shareholders and managers. available by the authors.
Implementing an equity incentive for corporate executives is
considered a good way to alleviate the principal-agent problem,
but it also raises the problem of corporate tax avoidance. This
paper empirically analyzes the relationship between management
Author contributions
equity incentive and corporate tax avoidance based on the literature
XW: conceptualization, methodology, and validation. MK:
on executive compensation incentives, internal control deficiencies
visualization, writing—original draft, and writing—review
and corporate tax avoidance at home and abroad (Phillips, 2003;
and editing. LQ: methodology, software, formal analysis, data
Desai and Dharmapala, 2006; Robinson et al., 2010; Henry et al.,
curation, and writing—original draft. AR: validation and writing—
2011; Rego and Wilson, 2012; Balsam et al., 2014; Gaertner, 2014;
review and editing. All authors read and approved the final
Powers et al., 2016; Khan et al., 2019; Zhang et al., 2019, 2020; Zhou
manuscript.
and Hu, 2021), by using A-share listed companies in China from 2016
to 2020 research sample. The results show that: (1) There is a positive
relationship between management equity incentive and enterprise tax
avoidance behavior. That is, the more the stock incentive offered to Funding
executives, the more likely corporations are to pursue tax avoidance
strategies aggressively. When executives are given an equity incentive, This work was mainly supported by the major project of Institute
their individual interests are linked with the company’s objectives, of Digital Finance, Zhejiang University City College. Further, we also
indicating that they are driven to enhance their business performance acknowledge the Natural Science Foundation of Zhejiang Province
through tax avoidance by gaining bigger profits. (2) Internal control (CN) (grant number Y19G010010); and the Youth program of
deficiencies enhance the positive correlation between equity incentive National Natural Science Foundation of China (CN) (grant number
and enterprise tax avoidance behavior. According to objective 71704158).
statistics, most Chinese businesses are still in the early stages of
their internal control development process. In Chinese businesses,
the lack of an internal control system and the failure of internal
control measures are prevalent, and such loopholes can intensify the Acknowledgments
tax avoidance behavior that arises when executives are subject to
equity incentive. (3) The influence of management equity incentive We thank editor, the associate editor, and referees.
on enterprise tax avoidance behavior is greater in state-owned
firms than in private enterprises. State-owned enterprises have a
greater likelihood of increasing enterprise tax avoidance behavior Conflict of interest
when management is subject to equity incentive for reasons such as
strict performance requirements, lower regulatory oversight, and less The authors declare that the research was conducted in the
interference from negative information.
absence of any commercial or financial relationships that could be
Relevant managerial and policy implications are as follows:
construed as a potential conflict of interest.
First of all, the state should require enterprises to fully disclose
relevant information and reduce information asymmetry. It should
increase the supervision as well as the punishment for enterprises’
wrongdoings to act as a deterrent for them. Simultaneously, the Publisher’s note
government should pay more attention to enterprises that have
already committed tax irregularities and conduct regular inspections All claims expressed in this article are solely those of the
to prevent tax irregularities from happening again. Enterprises should authors and do not necessarily represent those of their affiliated
fully recognize the important role of internal control system to organizations, or those of the publisher, the editors and the reviewers.
their development, establish sound internal control and supervision Any product that may be evaluated in this article, or claim that may
mechanism, improve modern management system of enterprises be made by its manufacturer, is not guaranteed or endorsed by the
and establish effective information communication mechanism. publisher.

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Wenwu et al. 10.3389/fpsyg.2023.1096674

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