Accounting and Finance 53 (2013) 1029–1051

2013 A&F Conference Article

Government ownership, corporate governance and tax
aggressiveness: evidence from China

K. Hung Chana, Phyllis L. L. Mob, Amy Y. Zhouc

a
Department of Accountancy, Lingnan University, Hong Kong, China
b
Department of Accountancy, City University of Hong Kong, Hong Kong, China
c
PricewaterhouseCoopers, Hong Kong, China

Abstract

This study investigates how government ownership and corporate governance

influence a firm’s tax aggressiveness. Using Chinese listed companies during
2003–2009, we find that compared with government-controlled firms, non-
government-controlled firms pursue a more aggressive tax strategy. In particular,
non-government-controlled firms with a higher percentage of the board share-
holdings and with a CEO who also serves as the board chairman are more
aggressive. For government-controlled firms, we find that board shareholding has
an impact on tax aggressiveness and it does not differ between local and central
government-controlled firms. However, local government-controlled firms in less
developed regions where the implementation of corporate governance measures
is generally less effective are more tax aggressive than those in other regions.

Key words: Corporate governance; Government ownership; Tax aggressiveness

JEL classification: G34, H26

doi: 10.1111/acfi.12043

1. Introduction
This study examines how government ownership and corporate governance
affect a firm’s tax aggressiveness in China.1 We give particular attention to the

We thank Steven Cahan (the editor), an anonymous referee, Chen Chen (discussant) and
participants of the 2013 Accounting and Finance Conference (Queenstown, NZ) for
helpful comments. Phyllis Mo acknowledges financial support from City University of
Hong Kong (Project no. 7200272) and He Miao’s research assistance.
1
Following existing literature (e.g. Frank et al., 2009; Chen et al., 2010), tax
aggressiveness is defined as a firm’s effort to minimize its tax payment through
aggressive tax planning and avoidance activities.
Received 29 October 2012; accepted 30 July 2013 by Steven Cahan (Editor in Chief).

© 2013 AFAANZ
1030 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

influence of government ownership on tax aggressiveness because government

control of corporations is pervasive in most transitional economies (Chen et al.,
2009). In recent years, many governments have relinquished control of a segment
of their economies through privatization programmes. However, these govern-
ments or their agencies still maintain control of a significant number of companies
especially those in key industries such as telecommunication and defence
(Krivogorsky, 2000; Chen et al., 2009). There have been recent calls for evidence
on the role that government ownership plays in corporate tax aggressiveness (e.g.
Hanlon and Heitzman, 2010). As government-controlled and non-government-
controlled companies have different stakeholders and governance practices, it will
be interesting to examine how they may differ in their tax strategies.
Recent studies have investigated how state ownership affects firms’ tax
reporting practices in China. Zeng (2011), for example, finds that government-
controlled firms are less tax aggressive compared with non-government-
controlled firms. Wu et al. (2013) also provide evidence that local state-owned
enterprises (SOEs) pay a higher level of tax than private firms. However, these
studies do not examine the effect of corporate governance on firms’ tax strategies.
On the other hand, there are studies that provided evidence on the linkages
between corporate governance and a company’s tax avoidance in the West. For
example, Minnick and Noga (2010) find that corporate governance plays a role
in the long-term tax management of US firms. In particular, compensation
incentive for directors is an important driver for tax management. In addition,
Lanis and Richardson (2011) find that having a higher proportion of
independent directors on the board reduces the likelihood of tax aggressiveness
in Australia. However, these studies do not deal with the effect of ownership
structure on tax reporting. In this study, we examine the impact of government
ownership, corporate governance and their interactive effect on a firm’s tax
reporting. Specifically, we focus on several specific board characteristics which
are indicative of corporate governance and compare their impacts on the tax
aggressiveness for government versus non-government-controlled firms.
We take advantage of the institutional setting in China to develop our
hypotheses. First, for many Chinese listed companies, the ultimate controlling
shareholder is the Chinese government, which influences company management
through its shareholding and political power (Liu and Lu, 2007; Lo et al.,
2010). As such, managers of government-controlled firms may have different
tax incentives compared with their counterparts in the private sector. On the
one hand, as they are appointed and evaluated by the government owners, they
may be eager to protect government revenues by avoiding aggressive tax
planning because such tax planning will raise the after-tax profits that other
shareholders keep at the expense of the government (e.g. Crocker and Slemrod,
2005; Zhang, 2006). On the other hand, managers of government-controlled
firms may want to maximize corporate resources under their control through
aggressive tax planning and to divert such resources for individual gains as
their salary and compensation level is quite low compared with the private

© 2013 AFAANZ
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1031

sector (e.g. Bushman et al., 2004; Wang et al., 2008; Guedhami et al., 2009). In
this study, we provide empirical evidence to shed light on the dominance of
these two competing incentives in China’s setting.
Second, Chinese stock market provides a high-power context for our
research as under-developed institutional infrastructure and corporate gover-
nance leave minority shareholders vulnerable to tunnelling (Jiang et al.,
2010). Third, prior studies provide mixed and inconclusive results on the
impact of board characteristics on firm performance and earnings manage-
ment in China (Chen et al., 2006; Liu and Lu, 2007; Lo et al., 2010). While
Minnick and Noga (2010) find that, other than compensation contracts,
board characteristics do not influence a company’s tax management in the
United States, how corporate governance in China affects tax aggressiveness
is yet to be explored.
Using data from all non-financial A-share companies listed in China during
2003–2009, we examine how ownership type and board characteristics affect
tax aggressiveness. Overall, our results show that government ownership and
corporate governance play an influential role in tax management in China.
Compared with government-controlled firms, non-government-controlled
firms are more tax aggressive. The finding suggests that managers of
government-controlled firms are more eager to achieve the political objective
of protecting government revenue in their tax strategy. For board charac-
teristics, we find that firms with a higher percentage of board shareholdings
and having a CEO who also serves as the board chairman are more tax
aggressive. The effect of duality role of board chairman is primarily driven by
non-government-controlled firms, and there is an absence of such a
relationship for government-controlled firms. Furthermore, the proportion
of independent directors on the board does not have any effect on tax
aggressiveness for all firms. Our additional analysis of government-controlled
firms shows that local government-controlled firms located in less developed
regions with generally less effective implementation of corporate governance
measures are more tax aggressive than those in more developed regions. We
do not find regional differences for other government or non-government-
controlled firms.
This study contributes to the extant literature by providing empirical
evidence on the influence of government ownership, corporate governance and
their interactions on tax aggressiveness. Extant studies on China document that
bureaucrats in SOEs are detrimental to shareholders in terms of firm
performance (e.g. Fan et al., 2007). Our study provides evidence that managers
of government-controlled firms are more eager to fulfil their political
objectives of protecting government revenue than to exploit complex tax
planning. In addition, prior literature has not compared the impact of board
effectiveness on tax aggressiveness for firms with different ownership type. This
study fills this gap in the literature by providing a direct examination of the
impact of board effectiveness on tax aggressiveness of government versus

© 2013 AFAANZ
1032 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

non-government-controlled firms. Government ownership of corporations is

traditionally a typical phenomenon in most transitional economies (Krivogor-
sky, 2000; Chen et al., 2009), and as the trend to privatize continues in these
economies, our research results should serve as a useful reference for them to
prepare for ways to improve tax compliance.
The rest of the study proceeds as follows. Section 2 discusses the relevant
institutional background in China. Section 3 reviews the related literature and
develops the hypotheses. Section 4 describes the data, research methodology
and regression model. Section 5 presents the results and sensitivity tests, and
Section 6 concludes.

2. Institutional background

2.1. Government ownership in China

The Chinese economy had been dominated by SOEs. The ownership

structure of SOEs in China is in the form of pyramid holdings held primarily by
the government (Liu and Sun, 2005). This highly concentrated government
ownership often leads to inefficient operations in the SOEs as their main
objective was to carry out the government’s political agenda rather than to
maximize shareholders’ wealth. To improve the efficiency and hence the
economic performance of the firms, the Chinese government has undertaken
measures to reduce its holdings in listed companies through the sale of state
shares to other groups of investors such as institutional and individual
investors (Chan et al., 2007). This ownership structure reform aims at
transforming the SOEs to give more autonomy to managers to run the firms
with reduced government influence and to make them more responsive to the
market and investors. However, for the majority of listed firms in China, the
government still maintains a controlling ownership, particularly in important
industries such as banking, energy, transportation, natural resources and
telecommunication (Liu and Lu, 2007).
Compared with the diffuse ownership structure in most Western countries,
the ownership of many Chinese listed companies is concentrated in the hands of
the government through state-owned shares or legal-person shares (indirectly
owned by the government). For these firms, power is concentrated and power
distance is large (Chan et al., 2003). Very often, it is the government that
appoints, motivates and disciplines managers, and investors in government-
controlled firms are largely outsiders as the government seldom appoints
directors representing minority shareholders (Zhang, 2006; Fan et al., 2007).
The government pursues its own objectives and often limits the firm’s ability to
maximize wealth at the expense of other stakeholders. Thus, the agency
problem for government-controlled firms can be quite different from non-
government-controlled firms.

© 2013 AFAANZ
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1033

2.2. Corporate governance in China

An important milestone for the development of corporate governance in

China was the issuance of the Code of Corporate Governance for Listed
Companies in China (the ‘Code’) by China Securities Regulatory Commission
(CSRC) in 2001. The Code sets up the principles on investor protection and the
code of conduct for managers, directors as well as supervisors. Other
regulations that relate to corporate governance include the Company Law
and the Establishment of Independent Directors Systems by Publicly Listed
Companies Guiding Opinion (the ‘Guiding Opinion’). However, taken together,
the corporate governance in Chinese listed companies is still under-developed.
For example, several characteristics of the board of directors of Chinese
companies indicate potential problems. First, many independent directors have
close relationships with company owners. Although this facilitates information
sharing, it raises questions on the board’s independence (Su, 2010). Second, the
duality role of the board chairman is not prohibited in China. A firm’s CEO
can also serve as the chairman of the board. This may weaken the supervisory
function of the board. Third, the board of directors of government-controlled
firms often consists of representatives or officials from the government and
other state entities, whose interests and motivations are not the same as those
of outside investors (Tenev and Zhang, 2002; Su, 2005).

3. Literature review and hypothesis development

3.1. Government ownership and tax aggressiveness

Prior studies provide evidence on the association between ownership

structure and tax aggressiveness. For example, Desai and Dharmapala (2008)
find that firms with concentrated ownership have greater incentives to avoid
taxes as they have lower non-tax costs. However, Khurana and Moser (2009)
find that firms with higher levels of long-term institutional ownership are less
tax aggressive because institutional owners are more concerned with the long-
term consequences of aggressive tax strategy. Similarly, Chen et al. (2010) find
that family-owned firms are less tax aggressive. In this study, we focus on the
effect of government ownership on tax aggressiveness.
In China, as discussed earlier, the economy had been dominated by SOEs.
Although the Chinese government has recently relinquished some controls in
SOEs via privatization programmes, the governments (central and local) still
maintain as a controlling shareholder in a large number of corporations (Liu
and Lu, 2007). Similar to institutional investors, government ownership is a
long-term institutional ownership. In this sense, according to Khurana and
Moser (2009), we expect government-controlled firms are less tax aggressive. In
addition, managers of government-controlled firms, who are appointed by the
government, are required to achieve political and social objectives, and some of

© 2013 AFAANZ
1034 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

them may actually be eager to be a ‘leader’ in paying taxes even at the expense
of firm value (Shleifer and Vishny, 1994; Chang and Wong, 2004). Further-
more, a serious violation of tax laws not only involves penalty (which averages
to 25 per cent of the additional tax for transfer pricing violations) (Ernst &
Young, 2012), but can also jeopardize their political career (Cao and Dou,
2007). Besides, the government owners often have an incentive to ‘cash out’ the
firm’s earnings in the form of tax collection. In summary, managers of
government-controlled firms should be eager to protect government revenues
and thereby less aggressive in tax reporting.
On the other hand, according to recent evidence, some of these managers
may have competing incentives to collude with insiders to divert corporate
resources for individual gains (Bushman et al., 2004; Bushman and Piotroski,
2006; Wang et al., 2008; Guedhami et al., 2009). Prior research suggests that
diversion activities are rather common in China (e.g. Jiang et al., 2010). To
facilitate their diversionary practices, they can exploit complex tax planning
to keep more resources in the firms or for tunnelling purposes (e.g. Desai and
Dharmapala, 2006; Lo et al., 2010). In addition, the Chinese tax regulations
stipulate that tax revenue collected from all local government-controlled firms
and some central government-controlled firms must be shared among
different layers of government. For example, for the corporate income tax
paid by local government-controlled firms, the local government can take
only 40 per cent of the tax revenue (State Council, 2001). Because the
respective local government does not get 100 per cent of the tax dollar
collected from its own enterprises, this may motivate the respective
government to direct their firms to minimize tax payment to keep more
resources in its controlled firms.
In summary, there are two competing tax strategies for managers of
government-controlled firms. Overall, given that managers of government-
controlled firms are government bureaucrats, their promotion and career
prospects are evaluated by various political and social objectives, not just
financial objectives such as maximization of firm value (Fan et al., 2007; Chen
et al., 2010), we expect that the political objectives of protecting government
revenues should dominate in a government-controlled firm’s tax reporting
strategy. Accordingly, we formulate our first hypothesis as follows:

H1: Ceteris paribus, government-controlled firms are less tax aggressive than
non-government-controlled firms.

3.2. Corporate governance and tax aggressiveness

The board of directors plays an important role in a firm’s corporate

governance. Some recent studies provide evidence that board characteristics
affect a firm’s tax strategies (e.g. Minnick and Noga, 2010; Lanis and
Richardson, 2011). In this study, we specifically examine the impact of board

© 2013 AFAANZ
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1035

composition, duality role of the board chairman and board shareholdings on

the tax aggressiveness of government versus non-government-controlled firms.

3.2.1. Board composition

The composition of the board of directors is an important determinant of its

effectiveness, and there should be a proper mixture of insiders and outsiders on
the board (Fama and Jensen, 1983). On the one hand, the board with more
insiders may potentially face ‘independence’ problem because their monitoring
role is diminished by engaging in self-reviewing activities. On the other hand, a
large number of outsiders can create a wider gap between the board and the
management as they have less insight on firm operations.
Prior studies generally find that independent directors have a positive impact
on deterring earnings management. For example, Park and Shin (2004) find
that independent directors with financial expertise are able to reduce earnings
management. Similarly, Peasnell et al. (2005) find that firms with a high
percentage of independent directors are less likely to engage in opportunistic
earnings management. Kato and Long (2006) also assert that independent
directors who are truly independent of the controlling shareholders have
potential to improve the quality of corporate governance (which we argue
should reduce tax aggressiveness). Uzun et al. (2004) find that firms with a high
percentage of independent directors have less financial fraud because indepen-
dent directors have fewer incentives for the firms to commit fraud. Based on a
small sample of matched tax-aggressive and non-tax-aggressive Australian
firms, Lanis and Richardson (2011) find that a higher proportion of
independent directors reduces the likelihood of tax aggressiveness.
In the Chinese context, based on 169 fraud cases investigated by the CSRC,
Chen et al. (2006) find that firms with a high proportion of non-executive
directors on board are less likely to engage in security-related frauds. Similarly,
Lo et al. (2010) provide evidence that firms with a board that has a high
percentage of independent directors have a smaller magnitude of transfer
pricing manipulations. These results appear to suggest that outside directors
are able to monitor the actions of managers and deter fraudulent acts.
Moreover, compared with executive directors, independent directors, given
their social status, should be more concerned about the long-term reputational
effect of management decisions. Tax avoidance activities are short-term
opportunistic managerial behaviours, which could incur significant long-term
costs. In particular, government appointed outside board members in govern-
ment-controlled firms should be even less interested in tax aggressiveness as
paying tax is an important political ‘duty’ for them in China.
On the other hand, many independent directors in China maintain close
relationships with management and are often political allies or friends and
relatives of the senior managers/owners. They are also in a weak position
within Chinese boards, and they are more decorative than functional (Su,

© 2013 AFAANZ
1036 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

2005). They do not want to antagonize senior management or major

shareholders as they have the incentive to maintain their directorship and
their director fees are in part dependent on the company’s after-tax profit.
Furthermore, corporate tax avoidance behaviours in China are generally
conceived by shareholders as value-increasing, especially those of non-
government-controlled firms. Many independent directors who act on behalf
of the shareholders may not curb firms’ aggressive tax strategy.
Based on the above discussions, it is an empirical question whether firms with
a higher percentage of independent directors are more or less tax aggressive.
Hence, we formulate our hypothesis as follows:

H2a: Ceteris paribus, there is a difference in tax aggressiveness between

companies with different percentages of independent directors on board.

3.2.2. CEO as chairman of the board

The duties of the board chairman include the handling of board meetings
and overseeing the hiring, termination, and compensation of the CEO and
other senior executives (Jensen, 1993). The CEO, as the executive leader of a
firm, is the final decision-maker in terms of entity operations. It is not
uncommon that the chairman and CEO are the same person in the United
States, while in most European countries, these two roles are most often
separated (Lin and Liu, 2009). The different practices across countries reveal
the costs and benefits of the chairman’s duality role (Braun and Sharma, 2007).
On the one hand, the combined leadership structure creates efficiency in
decision-making and effective leadership in ensuring that firm strategy
formulation and implementation by the CEO will be better coordinated (Chen
et al., 2006). Moreover, the duality role of chairman can avoid potential rivalry
between the CEO and chairperson and eliminate the confusion as a result of
the existence of two spokespersons. On the other hand, agency theory suggests
that more effective control over managers to align their interests to the
shareholders will be better achieved by the separation of the CEO from the
chairman. The co-services performed by the board chairman may impair
effective monitoring and also hinder honest evaluation of firm performance by
the board which in turn leads to long-term adverse consequences (Dalton and
Kesner, 1997; McWilliams and Sen, 1997).
We expect that the duality role of the board chairman can increase the level
of a firm’s tax aggressiveness in part because the oversight and governance
role of the board is potentially reduced. Furthermore, when the leadership is
concentrated in one decision-maker, there is a higher risk of having
irregularities like those involving frauds and taxes (Chan et al., 2003; Chen
et al., 2006; Lo et al., 2010). It is also more difficult for other board members
to challenge his/her tax proposals. While co-services result in concentrated
leadership for both government- and non-government-controlled firms, the

© 2013 AFAANZ
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1037

nature of their leadership is different. As discussed earlier, the CEOs of

government-controlled firms are government bureaucrats and they are more
concerned about social and political issues, and should be less tax
aggressiveness. Therefore, we expect that non-government-controlled firms
that have the CEO serve as the board chairman will be more tax aggressive,
but this effect may not be significant for government-controlled firms. Based
on the above reasons, we hypothesize that:

H2b: Ceteris paribus, companies with the same person serving as CEO and the
board chairman are more tax aggressive, particularly for non-government-
controlled companies.

3.2.3. Board shareholdings

Equity ownership by board members creates incentive for directors to protect

their financial stake in the firm. Johnson et al. (1993) find that the more equity
holdings by board members, the more their involvement in strategic restruc-
turing. Morck et al. (1988) suggest a positive relation between board
shareholdings and firm performance. Kren and Kerr (1997) find that a firm
with a board of directors that has significant shareholdings exhibits a stronger
linkage between firm performance and compensation. In this study, we analyse
board shareholding instead of CEO shareholding because we want to address
the influence of the board as a whole on tax reporting.
With board shareholdings, the interests of the board of directors are directly
aligned with firm performance. Tax aggressiveness, which serves as a way to
increase after-tax firm value, can help the board members enjoy the benefits of
increased share values. Moreover, McWilliams and Sen (1997) show that when
directors increase their ownership of the firm, the potential managerial
entrenchment incentives increase. With more shareholdings, the directors have
greater incentives to work to increase the value of the company. One possible
method to increase firm value is through aggressive tax management.
Based on the above reasoning, we hypothesize that:

H2c: Ceteris paribus, companies with a higher percentage of board shareholdings

are more tax aggressive.

4. Research method

4.1. Data collection

Our sample consists of all A-share non-financial companies listed in

Shanghai and Shenzhen Stock Exchanges for the period 2003–2009. These

© 2013 AFAANZ
1038 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

A-share companies are all domestic Chinese companies (i.e. they are not
foreign investment enterprises). We chose the sample period because the
Corporate Governance Code was effective from 2002, and the related controlling
shareholder data are available from 2003 onwards. Consistent with prior
studies (e.g. Gupta and Newberry, 1997; Frank et al., 2009; Chan et al., 2010),
we excluded finance and insurance firms because of their special financial
reporting requirements. We deleted 1454 observations with missing data and
1337 observations with insufficient data to calculate measures of tax aggres-
siveness (i.e. ETRs and alternative measures). Furthermore, following prior
studies (Gupta and Newberry, 1997; Chen et al., 2010; Wu et al., 2013) and to
eliminate outliers, we restricted observations with ETRs within the range of [0,
1]. The final sample consists of 6032 firm-year observations. We collect all
financial data and board characteristics from China Stock Market and
Accounting Research (CSMAR) database, which has been used by several
recent studies (Chen et al., 2006; Lo et al., 2010). Panel A of Table 1 shows the
summary of the sample selection process. Panel B reports the distribution of
sample firms by year. The number of firms is almost evenly distributed over the
7-year sample period.

Table 1
Sample selection and sample distribution

Panel A: Sample selection

Firm-year observations of all listed A-share non-financial 10122

companies between 2003 and 2009
Less observations with missing data 1454
Less observations with insufficient data 715
to calculate ETR
Less observations with insufficient data 622
to calculate RETR
Less observations with ETR < 0 or ETR > 1 1299
Total number of observations for regression 6032

Panel B: Yearly distribution

Years No. of firm-years (%)

2003 773 (13)

2004 852 (14)
2005 780 (13)
2006 842 (14)
2007 946 (16)
2008 931 (15)
2009 908 (15)
Total 6032 (100)

© 2013 AFAANZ
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1039

4.2. Model

To test the effects of government ownership and board characteristics on tax

aggressiveness, we estimate the following model:

RETRit ¼ b0 þ b1 Govtit þ b2 Indep directorit þ b3 Co servicesit

þ b4 BOD sharesit þ b5 LEVit þ b6 SIZEit þ b7 MBit
þ b8 ROAit þ b9 CAPINTit þ b10 INVINTit ð1Þ
þ b11 RIGHTSit þ b12 MKTINDit þ Year Dummies
þ Industry Dummies þ eit :

The effective tax rate, ETR, is a common measure of corporate tax

aggressiveness in prior literature (e.g. Gupta and Newberry, 1997; Hanlon and
Slemrod, 2009; Wilson, 2009; Chen et al., 2010). Following Wu et al. (2013),
we define ETR as the ratio of the current portion of tax expense to adjusted
taxable income.2 Given the variation in tax rates within China due to various
tax preferential policies, a low ETR may be due to a preferential tax rate and
therefore has little to do with tax reporting aggressiveness. To resolve this
problem, we adjust the ETR by the applicable tax rate (ATR) of a company in a
given year.3 We use the ratio of ETR to ATR (i.e. RETR) as the dependent
variable in our main analysis. As the RETRs are bound to fall between 0 and 1,
we estimate the model using a double-censored Tobit regression. We also
estimate a separate regression for each ownership type.
The explanatory variable, Govt, is a dummy variable used to test the effect of
government ownership on tax aggressiveness. Govt equals to 1 if the controlling
shareholder is the Chinese government (central or local), and 0 otherwise.
Controlling shareholder is defined according to Article 41 of the Guidelines for
the Articles of Association of Listed Companies.4 As hypothesized in H1, a
government-controlled firm has less incentive to engage in aggressive tax
strategy. Therefore, we expect b1 to be positive. The Indep_director, Co_services
and BOD_shares are variables for board characteristics. Indep_director denotes
the percentage of independent directors served on the board. According to H2

2
According to Wu et al. (2013, 18), adjusted taxable income is calculated as profit
before tax + asset impairment – investment returns (excluding cash dividends and bond
interests). Using the traditional ETR (tax expense/pre-tax profit) yields similar results.
3
ATR is the statutory tax rate for a company in a given year which takes into account of
tax rate reductions due to industry (e.g. high technology), location (e.g. minority areas)
and other factors.
4
Controlling shareholder is one who satisfies at least one of the following criteria: (a)
one who can elect more than half of the directors, (b) one who can execute over 30 per
cent of controlling rights, (c) one who holds more than 30 per cent of shares or (d) one
who can control the company in practice by other means.

© 2013 AFAANZ
1040 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

(a), we do not predict a sign for b2. Co_services is a dummy variable which
equals to 1 if the board chairman also serves as a firm’s CEO, and 0 otherwise.
Consistent with H2(b), we predict that the duality role of the board chairman
will lead to more tax aggressiveness and therefore b3 should be negative.
BOD_shares measures the board shareholdings, which is the percentage of a
firm’s shares held by all directors of the board. As hypothesized in H2(c), we
expect b4 to be negative.
Following prior literature, we include six control variables that are found to
have influence on tax aggressiveness. LEV denotes a firm’s capital structure,
which is measured as total liabilities divided by total assets. On the one hand, a
firm with high financial leverage would have lower ETRs (and thus a lower
RETR, other things being equal) because of the deductibility of interest
payments for tax purpose. On the other hand, a firm with a low tax burden has
less incentive to use debt financing. Graham and Tucker (2006) find that tax
shelter participants use less debt because firms use tax shelter deductions as a
substitute for the interest deduction associated with debt. Similarly, Gupta and
Newberry (1997) also find a positive relation between ETR and debt financing.
Size is measured as the natural logarithm of the total assets. While larger firms
have more resources for tax planning and are better able to reduce their tax
burdens (Shevlin and Porter, 1992; Dyreng et al., 2008), they are also subject to
a greater level of public scrutiny that results in less tax aggressiveness. MB is
the market to book ratio and is used to measure the firm’s investment
opportunities. Spooner (1986) argues that ETR may be higher for firms with
greater investment opportunities. However, Derashid and Zhang (2003) and
Chen et al. (2010) find inconsistent results with different measures of ETRs.
ROA denotes a firm’s profitability and is calculated as the pre-tax income
divided by the total assets. Prior studies find that more profitable companies
would have higher ETRs (Gupta and Newberry, 1997; Wilson, 2009). CAPINT
and INVINT are used to control for assets mix (Gupta and Newberry, 1997).
CAPINT equals property, plant and equipment divided by total assets, and
INVINT is the year-end total inventory divided by total assets. Capital-
intensive (CAPINT) firms are more affected by the differences in accounting
and tax treatments of depreciation. In China, after the adoption of IFRS, the
significant increase in book-tax differences would lead to more scrutiny by tax
authorities (Chan et al., 2010). To reduce the risk of being selected for tax
audit, CAPINT firms may want to have a higher ETR. On the other hand, with
the tax benefits associated with capital investments, CAPINT firms may have
lower ETRs. Finally, the book-tax differences in the valuation of inventory
may motivate inventory intensive (INVINT) firms to maintain a higher level of
ETR.
To control for the effect of earnings management on a firm’s tax
aggressiveness, we include a dummy variable, RIGHTS, which equals to 1 if
the firm applies for a rights offering in one of the next 3 years (Chan et al.,
2010). Firms with a rights offering have more incentive to manage earnings to

© 2013 AFAANZ
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1041

satisfy Chinese regulatory requirements. Besides, in China, different geograph-

ical regions have different institutional developments. Implementation of
regulations is often less effective in less developed regions. To control for this
effect, we include a dummy variable, MKTIND (=1 if a firm is located in a well-
developed province).5 Finally, we also include industry dummies and year
dummies to control for potential industry and year fixed effects.

5. Empirical results

5.1. Descriptive statistics and univariate tests

Table 2 shows the descriptive statistics of the regression variables. The

mean of the dependent variable, RETR, is 67.7 per cent (the mean ETR is
16.2 per cent, and the mean ATR is 25.1 per cent). About 58 per cent of the
firms are government-controlled which indicates the vital role played by the
Chinese government in controlling listed companies. For the board charac-
teristics, on average, the sample firms have 35 per cent independent board
members and about 14 per cent of firms having the same person served as the
board chairman and CEO. On average, board members hold only about 3 per
cent of shares as government appointed board members normally do not hold
any shares. For the control variables, the average leverage ratio (LEV) is
47.7 per cent, which is considerable higher than US firms in the Chen et al.
(2010) study.
Table 2 also presents the descriptive statistics of all variables partitioned by
ownership type. The univariate tests indicate that there are significant
differences in board and other firm characteristics between government-
controlled and non-government-controlled firms. Government-controlled firms
have higher RETRs (68.9 per cent) than non-government-controlled firms
(65.9 per cent). This is consistent with our hypothesis that government
intervention results in less tax aggressiveness. For the board characteristics,
government-controlled firms have a lower ratio of independent directors, less
likely to have a CEO serving as the board chairman and much smaller board
shareholdings than non-government-controlled firms. For the firm character-
istics, government-controlled firms are more leveraged (LEV), larger in size
(SIZE), exhibit lower return (ROA) and lower market to book value (MB). In
addition, these firms are more CAPINT but less INVINT. Finally, more
government-controlled firms issue rights during the sample period but fewer
government-controlled firms are located in well-developed regions compared
with non-government-controlled firms.

5
Regions with well-developed (less-developed) institutions are defined as those with
yearly MKTIND above (below) the median among the 31 provinces in China, where
MKTIND is the market development index compiled by Fan et al. (2010).

© 2013 AFAANZ
1042 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

Table 2
Descriptive statistics and univariate tests

Government- Non-
controlled government-
Whole sample firms controlled firms
(N = 6032) (N = 3512) (N = 2520)

Variable Mean SD Mean SD Mean SD Diff. in Mean t-stat

RETR 0.677 0.478 0.689 0.469 0.659 0.491 0.030 2.39**

Govt 0.582 0.493 — — — — — —
Indep_director 0.351 0.048 0.346 0.047 0.358 0.049 0.011 8.92***
Co_services 0.137 0.344 0.093 0.290 0.199 0.400 0.106 11.98***
BOD_shares 0.030 0.107 0.002 0.012 0.069 0.157 0.067 25.36***
LEV 0.477 0.179 0.483 0.177 0.470 0.183 0.013 2.86***
SIZE 21.453 0.999 21.631 0.994 21.204 0.952 0.427 16.73***
MB 3.943 8.703 3.357 4.523 4.760 12.317 1.404 6.20***
ROA 0.079 0.062 0.074 0.053 0.086 0.073 0.012 7.11***
CAPINT 0.292 0.185 0.322 0.193 0.251 0.164 0.071 14.99***
INVINT 0.174 0.152 0.166 0.147 0.187 0.158 0.021 5.32***
RIGHTS 0.022 0.146 0.025 0.156 0.018 0.133 0.007 1.81**
MKTIND 0.805 0.396 0.777 0.416 0.844 0.362 0.067 6.47***

*** and ** indicate statistical significance at the 1 and 5 per cent levels (two-tailed tests),
respectively. Variable definitions: RETR, ratio of effective tax rate to applicable tax rate;
Govt, 1 if controlling shareholder is the government, 0 otherwise; Indep_director, percentage
of independent directors on the board; Co_services, 1 if the chairman of the board is also the
CEO of the firm, 0 otherwise; BOD_shares, percentage of shares held by the board members;
LEV, ratio of year-end total liabilities to total assets; SIZE, nature logarithm of year-end
total assets; MB, ratio of year-end market value per share to net assets per share; ROA, ratio
of year-end pre-tax income to total assets; CAPINT, ratio of year-end property, plant, and
equipment (PPE) to total assets; INVINT, ratio of year-end inventory to total assets;
RIGHTS, 1 if the firm has rights offering in the next 3 years, 0 otherwise; MKTIND, 1 if the
firm is located in a well-developed province, 0 otherwise.

Table 3 presents the correlations among the explanatory variables. Most of

the correlations among the test and control variables are small, and all of them
are <0.51. Thus, multicollinearity should not be an issue.

5.2. Multivariate analysis

Table 4 presents the Tobit regression results for the model.6 The industry and
year dummies are included but not tabulated. The coefficient on Govt is
positively significant at the 5 per cent level indicating that government control

6
Using OLS regression analysis provides similar results.

© 2013 AFAANZ
 Table 3

© 2013 AFAANZ
Correlation matrix

RETR Govt Indep_director Co_services BOD_shares LEV SIZE MB ROA CAPINT INVINT RIGHTS

RETR 1.000
Govt 0.031** 1.000
Indep_ 0.015 0.114*** 1.000
director
Co_services 0.027** 0.152*** 0.056*** 1.000
BOD_shares 0.060*** 0.310*** 0.106*** 0.139*** 1.000
LEV 0.042*** 0.037*** 0.013 0.074*** 0.166*** 1.000
SIZE 0.023 0.211*** 0.006 0.131*** 0.196*** 0.332*** 1.000
MB 0.011 0.080*** 0.038*** 0.074*** 0.028** 0.093*** 0.075*** 1.000
ROA 0.006 0.091*** 0.029** 0.050*** 0.141*** 0.250*** 0.042*** 0.176*** 1.000
CAPINT 0.151*** 0.190*** 0.085*** 0.054*** 0.132*** 0.063*** 0.109*** 0.046*** 0.024** 1.000
INVINT 0.102*** 0.068*** 0.057*** 0.008 0.004 0.309*** 0.087*** 0.015 0.092*** 0.504*** 1.000
RIGHTS 0.006 0.023 0.021 0.003 0.029** 0.057*** 0.065*** 0.003 0.021 0.010 0.005 1.000
MKTIND 0.020 0.083*** 0.012 0.039*** 0.099*** 0.018 0.044*** 0.024 0.017 0.107*** 0.050*** 0.135***

** and *** indicate statistical significance at the 5 and 1 per cent level (two-tailed tests), respectively. See Table 2 for variable definitions.
K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051
1043
 1044

Table 4
Tobit regression results (dependent variable is RETR)

© 2013 AFAANZ
Full sample Government-controlled firms Non-government-controlled firms
Predicted sign Coefficient (t-statistic) Coefficient (t-statistic) Coefficient (t-statistic)

Intercept 0.7713 (7.46)*** 0.9741 (7.22)*** 0.5133 (3.07)***

Govt + 0.0195 (2.12)** — —
Indep_director ? 0.1474 (1.72) 0.1059 (0.93) 0.1688 (1.28)
Co_services — 0.0332 (2.79)*** 0.0075 (0.42) 0.0662 (4.19)***
BOD_shares — 0.1736 (4.21)*** 1.3976 (3.28)*** 0.1136 (2.63)***
LEV ? 0.2639 (9.66)*** 0.2747 (7.57)*** 0.2338 (5.47)***
SIZE ? 0.0058 (1.23) 0.0086 (1.42) 0.0223 (2.97)
MB ? 0.0009 (1.83) 0.0002 (0.12) 0.0009 (1.73)
ROA + 0.3762 (5.28)*** 0.6444 (5.50)*** 0.2343 (2.59)***
CAPINT — 0.2429 (8.62)*** 0.1856 (5.16)*** 0.3341 (7.33)***
INVINT + 0.1602 (4.24)*** 0.3159 (6.01)*** 0.0362 (0.66)
RIGHTS ? 0.0034 (0.13) 0.0530 (1.58) 0.0753 (1.61)
MKTIND ? 0.0126 (1.22) 0.0262 (2.04)** 0.0034 (0.20)
Year Dummies Included Included Included
Industry Dummies Included Included Included
Chi-square 710.57*** 468.27*** 321.63***

** and *** indicate statistical significance at the 5 per cent and 1 level (two-tailed tests), respectively. See Table 2 for variable definitions.
K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1045

can reduce companies’ incentives to manage taxes aggressively because

managers of those firms are under pressure to pursue political objectives
of protecting government revenue. Whereas for non-government-controlled
firms, managers may exploit complex tax planning to reduce tax expenses
for their individual and shareholders benefits. The results are consistent
with the prediction in H1 that government-controlled firms are less tax
aggressive.
For the board characteristics, the coefficients on Indep_director are negative
but not significant. On the other hand, the coefficients on Co_services and
BOD_shares are significant in the expected direction. The significant effect of
Co_services is mainly driven by the non-government-controlled firms. There-
fore, consistent with H2(b), non-government-controlled firms with the same
person serving as both the board chairman and CEO are more tax aggressive.
The dual appointment results in ineffective monitoring of the board and
obstructs its oversight and governance role. The significant negative coefficient
of board shareholdings for both government- and non-government-controlled
firms indicates that when more shares are owned by directors, there will be
greater incentives to engage in aggressive tax strategy. The result is in line with
H2(c).
Regarding the control variables, for both government- and non-government-
controlled firms, higher leverage (LEV), lower profitability (ROA), higher
capital (CAPINT) and lower inventory (INVINT) intensiveness are associated
with more tax aggressiveness. Furthermore, government-controlled firms
located in less developed (MKTIND) regions are more tax aggressive.
To further investigate what are the incentives that drive some managers of
government-controlled firms to pursue aggressive tax strategies, we perform
additional analysis for the government-controlled subsample by comparing the
results of the local government-controlled firms with those of the central
government-controlled firms. As mentioned earlier, starting from 2002, for
corporate income tax paid by local government-controlled firms, the local
government can take only 40 per cent of the tax. In other words, the respective
local government does not get 100 per cent of the tax dollar collected from its
own enterprises. This can provide an incentive for these firms to evade tax to
keep 100 per cent of the profit that otherwise will be taxed away in the local
government-controlled firms. The results in Table 5 show that there is no
significant difference in tax aggressiveness between local and central govern-
ment-controlled firms, and the impact of board-related corporate governance
on tax aggressiveness is also the same for local and central government-
controlled firms. However, the MKTIND variable is significant only for local
government-controlled firms, indicating that local government-controlled firms
in less developed regions are more tax aggressive. This is probably due to the
less effective implementation of corporate governance measures in those
regions.

© 2013 AFAANZ
1046 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

Table 5
Additional analysis for government-controlled firms (dependent variable is RETR)

Government- Local government- Central government-

controlled firms controlled firms controlled firms

Predicted Coefficient Coefficient Coefficient

sign (t-statistic) (t-statistic) (t-statistic)

Intercept 0.9723 (7.20)*** 0.9457 (4.92)*** 1.0226 (5.19)***

Local_govt — 0.0061 (0.56)
Indep_ ? 0.1056 (0.93) 0.1689 (1.14) 0.0359 (0.20)
director
Co_services — 0.0080 (0.44) 0.0004 (0.02) 0.0219 (0.75)
BOD_shares — 1.3933 (3.27)*** 1.2004 (2.35)** 2.0463 (2.64)***
LEV ? 0.2741 (7.55)*** 0.2856 (5.54)*** 0.2463 (4.65)***
SIZE ? 0.0087 (1.43) 0.0054 (0.62) 0.0152 (1.72)
MB ? 0.0001 (0.09) 0.0019 (0.63) 0.0006 (0.45)
ROA + 0.6455 (5.51)*** 0.8280 (4.91)*** 0.4620 (2.69)***
CAPINT — 0.1836 (5.08)*** 0.1754 (3.70)*** 0.1801 (3.19)***
INVINT + 0.3163 (6.02)*** 0.2419 (3.61)*** 0.4359 (5.10)***
RIGHTS ? 0.0529 (1.58) 0.0776 (1.77) 0.0185 (0.36)
MKTIND ? 0.0259 (2.01)** 0.0332 (2.00)** 0.0148 (0.73)
Year Included Included Included
dummies
Industry Included Included Included
dummies
Chi-square 468.58*** 272.54*** 226.60***

** and *** indicate statistical significance at the 5 and 1 per cent level (two-tailed tests),
respectively. See Table 2 for variable definitions.

5.3. Sensitivity tests

To examine the robustness of our results, we performed several sensitivity

tests. First, we use an alternative measure of tax aggressiveness, DETR, which
is the difference between ETR and ATR (i.e. ETR – ATR), synonymous to a
book-tax difference. The larger the difference between ETR and ATR, the more
aggressive the company is. The overall regression results shown in Table 6 are
similar to our main results in Table 4 except that the Indep_director becomes
significantly negative. This possibly suggests a collusion effect between the
independent directors and corporate management as discussed earlier. In
addition, the MKTIND variable shows that non-government-controlled firms
are more tax aggressive in well-developed regions, probably because there is
more tax planning expertise for private firms in those regions. Second, some
prior studies often define controlling shareholder as the one who holds more
than 20 per cent of a firm’s shares rather than the 30 per cent as stated in
Guidelines for the Articles of Association of Listed Companies in China. This

© 2013 AFAANZ
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1047

Table 6
Tobit regression results using an alternative definition of tax aggressiveness (dependent variable is
DETR)

Government- Non-government-
Full sample controlled firms controlled firms

Predicted Coefficient Coefficient Coefficient

sign (t-statistic) (t-statistic) (t-statistic)

Intercept 0.0506 (1.65) 0.0009 (0.02) 0.1219 (2.47)**

Govt + 0.0069 (2.51)**
Indep_ ? 0.0533 (2.09)** 0.0474 (1.39) 0.0493 (1.29)
director
Co_services — 0.0109 (3.07)*** 0.0058 (1.06) 0.0161 (3.45)***
BOD_shares — 0.0480 (3.92)*** 0.2345 (1.84)* 0.0342 (2.68)***
LEV ? 0.0848 (10.43)*** 0.0893 (8.21*** 0.0729 (5.79)****
SIZE ? 0.0030 (2.13)** 0.0005 (0.27) 0.0071 (3.21)***
MB ? 0.0001 (0.98) 0.0003 (0.73) 0.0002 (1.19)
ROA + 0.0078 (3.71)*** 0.1419 (4.04)*** 0.0428 (1.61)
CAPINT — 0.0817 (9.76)*** 0.0600 (6.12)*** 0.1022 (7.60)***
INVINT + 0.0275 (2.44)** 0.0782 (4.96)*** 0.0322 (2.00)**
RIGHTS ? 0.0023 (0.28) 0.0108 (1.08) 0.0214 (1.55)
MKTIND ? 0.0077 (2.51)** 0.0056 (1.45) 0.0104 (2.03)**
Year Included Included Included
dummies
Industry Included Included Included
dummies
Chi-square 607.34*** 395.00*** 274.79***

*, ** and *** indicate statistical significance at the 5 and 1 per cent level (two-tailed tests),
respectively. DETR is the difference between ETR and applicable tax rate. See Table 2 for
other variable definitions.

20 per cent requirement is also the threshold for preparing consolidated

financial statements. We therefore use the 20 per cent threshold for controlling
shareholding and rerun the regression. The results are reported in Table 7. The
results for ownership type and board characteristics are consistent with our
hypotheses and those in Table 4.
Third, China implemented a tax reform of reducing the tax rate for
domestic companies beginning in 2008. During the transition period of 2008–
2009, firms may have different behaviour towards tax management. To
control for the effect of tax reform in our analysis, we add a dummy variable,
Tax_reform, which equals to 1 if the sample period is after the tax reform
(2008–2009), and 0 otherwise. The results (not tabulated) are the same as
Table 4. We also further restrict our sample period to only the pre-tax reform
period (2003–2007) and rerun the regression. Again, the main results (not
tabulated) remain unchanged.

© 2013 AFAANZ
1048 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

Table 7
Tobit regression results using an alternative definition of controlling shareholdings (dependent
variable is RETR)

Government- Non-government-
Full sample controlled firms controlled firms

Predicted Coefficient Coefficient Coefficient

sign (t-statistic) (t-statistic) (t-statistic)

Intercept 0.8251 (7.80) 1.0093 (7.38)*** 0.5508 (3.18)***

Govt + 0.0196 (2.06)**
Indep_director ? 0.1610 (1.82) 0.1135 (0.99) 0.1860 (1.35)
Co_services — 0.0266 (2.17)** 0.0060 (0.32) 0.0560 (3.39)***
BOD_shares — 0.1978 (4.60)*** 1.3772 (3.23)*** 0.1425 (3.16)***
LEV ? 0.2756 (9.81)*** 0.2805 (7.58)*** 0.2501 (5.64)***
SIZE ? 0.0041 (0.86) 0.0098 (1.58) 0.0216 (2.78)***
MB ? 0.0007 (1.39) 0.0003 (0.24) 0.0007 (1.36)
ROA + 0.3553 (4.70)*** 0.6192 (5.20)*** 0.1837 (1.85)
CAPINT — 0.2382 (8.27)*** 0.1824 (4.99)*** 0.3259 (6.90)***
INVINT + 0.1624 (4.20)*** 0.3292 (6.16) 0.0456 (0.81)
RIGHTS ? 0.0082 (0.30) 0.0603 (1.80) 0.0802 (1.65)
MKTIND ? 0.0131 (1.23) 0.0252 (1.93) 0.0029 (0.16)
Year Included Included Included
dummies
Industry Included Included Included
dummies
Chi-square 668.07*** 445.81*** 296.74***

** and *** indicate statistical significance at the 5 and 1 per cent level (two-tailed tests),
respectively. See Table 2 for variable definitions.

6. Conclusions

This study examines the role of government ownership and corporate

governance in tax aggressiveness, providing new insights on how these variables
together affect tax avoidance activities. Using data for all A-share non-financial
companies listed in Shanghai and Shenzhen Stock Exchanges between 2003 and
2009, we find that government-controlled firms pursue less aggressive tax
strategies as compared to non-government-controlled firms. Non-government-
controlled firms with higher board equity holdings and duality duties
performed by the board chairman are more tax aggressive. These results
provide evidence that managers of government-controlled firms have the
political objectives of protecting government revenues, and they push their
firms to avoid pursuing aggressive tax planning. However, management of non-
government-controlled firms, particularly those with dominant CEOs, tend to
exploit aggressive tax planning. These results should alert public policy-makers
in transitional economies with privatization programmes to design appropriate
tax compliance measures.

© 2013 AFAANZ
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1049

Future extensions of this research include an investigation on whether the

executives of government-controlled firms do actually benefit from making
generous tax payments in terms of political appointments, promotions or
career advancements. On the other hand, for those aggressive tax planners, do
they actually divert corporate resources for individual gains such as investing in
their own pet projects? If so, tax aggressiveness may not enhance the value of
these firms.

References

Braun, M., and A. Sharma, 2007, Should the CEO also be chair of the board? An
empirical examination of family-controlled public firms, Family Business Review 20,
111–126.
Bushman, R. M., and J. D. Piotroski, 2006, Financial reporting incentives for
conservative accounting: the influence of legal and political institutions, Journal of
Accounting and Economics 42, 107–148.
Bushman, R. M., J. D. Piotroski, and A. J. Smith, 2004, What determines corporate
transparency?, Journal of Accounting Research 42, 207–252.
Cao, S. J., and K. Dou, 2007, Determinants of the variability of corporate effective tax
rates: evidence of listed company in China, Working paper (Chong Qing University).
Chan, K. H., K. Z. Lin, and P. L. L. Mo, 2003, An empirical study on the impact of
culture on audit-detected accounting errors, Auditing: A Journal of Practice and
Theory 22, 281–295.
Chan, K. H., K. Z. Lin, and P. L. L. Mo, 2010, Will a departure from tax-based
accounting encourage tax noncompliance? Archival evidence from a transition
economy, Journal of Accounting and Economics 50, 58–73.
Chan, K. H., K. Z. Lin, and F. Zhang, 2007, On the association between changes in
corporate ownership and changes in auditor quality in a transitional economy,
Journal of International Accounting Research 6, 19–36.
Chang, E. C., and S. M. L. Wong, 2004, Political control and performance in China’s
listed firms, Journal of Comparative Economics 32, 617–636.
Chen, G., M. Firth, D. N. Gao, and O. M. Rui, 2006, Ownership structure, corporate
governance, and fraud: evidence from China, Journal of Corporate Finance 12,
424–448.
Chen, G., M. Firth, D. N. Gao, and L. Xu, 2009, Does the type of ownership control matter?
Evidence from China’s listed companies, Journal of Banking and Finance 33, 171–181.
Chen, S., X. Chen, Q. Cheng, and T. Shevlin, 2010, Are family firms more tax aggressive
than non-family firms?, Journal of Financial Economics 95, 41–61.
Crocker, K.J., and J. Slemrod, 2005, Corporate tax evasion with agency costs, Journal of
Public Economics 89, 1593–1610.
Dalton, D., and I. Kesner, 1997, Composition and CEO duality in boards of directors:
an international perspective, Journal of International Business Studies 18, 33–42.
Derashid, C., and H. Zhang, 2003, Effective tax rates and the “industrial policy”
hypothesis: evidence from Malaysia, Journal of International Accounting, Auditing and
Taxation 12, 45–62.
Desai, M. A., and D. Dharmapala, 2006, Corporate tax avoidance and high-powered
incentives, Journal of Financial Economics 79, 145–179.
Desai, M. A., and D. Dharmapala, 2008, Taxation and corporate governance: an
economic approach, in: Schon W., ed., Tax and Corporate Governance (Springer-
Verlag, Berlin), 13–30.

© 2013 AFAANZ
1050 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051

Dyreng, S., M. Hanlon, and E. Maydew, 2008, Long-run corporate tax avoidance, The
Accounting Review 83, 61–82.
Ernst & Young, 2012, Global Transfer Pricing Tax Authority Survey (EY International
Ltd., New York).
Fama, E. F., and M. C. Jensen, 1983, Separation of ownership and control, Journal of
Law and Economics 27, 301–325.
Fan, J., T. J. Wong, and T. Zhang, 2007, Politically connected CEOs, corporate
governance, and post-IPO performance of China’s newly partially privatized firms,
Journal of Financial Economics 84, 330–357.
Fan, G., X. Wang, and H. Zhu, 2010, NERI Index of Marketization of China’s Provinces
2009 Report (Economic Science Press, Beijing).
Frank, M. M., L. J. Lynch, and S. O. Rego, 2009, Tax reporting aggressiveness and its
relation to aggressive financial reporting, The Accounting Review 84, 467–496.
Graham, J., and A. Tucker, 2006, Tax shelters and corporate debt policy, Journal of
Financial Economics 81, 563–594.
Guedhami, O., J. A. Pittman, and W. Saffar, 2009, Auditor choice in privatized firms:
empirical evidence on the role of state and foreign owners, Journal of Accounting and
Economics 48, 151–171.
Gupta, S., and K. Newberry, 1997, Determinants of the variability in corporate effective tax
rates: evidence from longitudinal data, Journal of Accounting and Public Policy 16, 1–34.
Hanlon, M., and S. Heitzman, 2010, A review of tax research, Journal of Accounting and
Economics 50, 127–178.
Hanlon, M., and J. Slemrod, 2009, What does tax aggressiveness signal? Evidence from
stock price reactions to news about tax shelter involvement, Journal of Public
Economics 93, 126–141.
Jensen, M. C., 1993, The modern industrial revolution, exit, and the failure of internal
control systems, Journal of Finance 48, 831–880.
Jiang, G., C. M. C. Lee, and H. Yue, 2010, Tunneling through intercorporate loans: the
China experience, Journal of Financial Economics, 98, 1–20.
Johnson, R., R. Hoskisson, and M. Hitt, 1993, Board of director involvement in
restructuring: the effects of board versus managerial controls and characteristics,
Strategic Management Journal 14, 33–50.
Kato, T., and C. Long, 2006, CEO turnover, firm performance, and enterprise reform in
China: evidence from micro data, Journal of Comparative Economics 34, 796–817.
Khurana, I., and W. Moser, 2009, Institutional ownership and tax aggressiveness,
Working paper (University of Missouri).
Kren, L., and J. L. Kerr, 1997, The effects of outside directors and board shareholdings
on the relation between chief executive compensation and firm performance,
Accounting and Business Research 27, 297–309.
Krivogorsky, V., 2000, Corporate ownership and governance in Russia, The Interna-
tional Journal of Accounting 35, 331–353.
Lanis, R., and G. Richardson, 2011, The effect of board of director composition on
corporate tax aggressiveness, Journal of Accounting and Public Policy 30, 50–70.
Lin, Z. J., and M. Liu, 2009, The impact of corporate governance on auditor choice:
evidence from China, Journal of International Accounting, Auditing and Taxation 18,
44–59.
Liu, G. S., and P. Sun, 2005, The class of shareholdings and its impact on corporate
performance: a case of state shareholding composition in Chinese public corporations,
Corporate Governance: An International Review 13, 46–59.
Liu, Q., and Z. Lu, 2007, Corporate governance and earnings management in the
Chinese listed companies: a tunneling perspective, Journal of Corporate Finance 13,
881–906.

© 2013 AFAANZ
 K. H. Chan et al./Accounting and Finance 53 (2013) 1029–1051 1051

Lo, A. W. Y., R. M. K. Wong, and M. Firth, 2010, Can corporate governance deter
management from manipulating earnings? Evidence from related-party sales trans-
actions in China, Journal of Corporate Finance 16, 225–235.
McWilliams, V. B., and N. Sen, 1997, Board monitoring and antitakeover amendments,
Journal of Financial and Quantitative Analysis 32, 491–505.
Minnick, K., and T. Noga, 2010, Do corporate governance characteristics influence tax
management?, Journal of Corporate Finance 16, 703–718.
Morck, R., A. Shleifer, and R. W. Vishny, 1988, Management ownership and market
valuation: an empirical analysis, Journal of Financial Economics 20, 293–315.
Park, Y. W., and H. H. Shin, 2004, Board composition and earnings management in
Canada, Journal of Corporate Finance 10, 431–457.
Peasnell, K. V., P. F. Pope, and S. Young, 2005, Board monitoring and earnings
management: do outside directors influence abnormal accruals?, Journal of Business
Finance and Accounting 32, 1311–1346.
Shevlin, T., and S. Porter, 1992, The corporate tax comeback in 1987: some further
evidence, The Journal of American Taxation Association 14, 58–79.
Shleifer, A., and R. Vishny, 1994, Politicians and firms, The Quarterly Journal of
Economics 109, 995–1025.
Spooner, G. M., 1986, Effective tax rates from financial statements, National Tax
Journal 39, 298–306.
State Council, 2001, Reform of Income Tax Revenue Sharing, Notice 37 (in Chinese)
(Ministry of Finance, Beijing, People’s Republic of China).
Su, D., 2005, Corporate finance and state enterprise reform in China, China Economic
Review 16, 118–148.
Su, D., 2010, Ownership structure, corporate diversification and capital structure:
evidence from China’s publicly listed firms, Management Decision 48, 314–339.
Tenev, S., and C. Zhang, 2002, Corporate Governance and Enterprise Reform in China
(World Bank, Washington, DC).
Uzun, H., S. H. Szewczyk, and R. Varma, 2004, Board composition and corporate
fraud, Financial Analysts Journal 60, 33–43.
Wang, Q., T. J. Wong, and L. Xia, 2008, State ownership, the institutional environment,
and auditor choice: evidence from China, Journal of Accounting and Economics 46,
112–134.
Wilson, R. J., 2009, An examination of corporate tax shelter participants, The
Accounting Review 84, 969–999.
Wu, W., O. M. Rui, and C. Wu, 2013, Institutional environment, ownership and firm
taxation, Economics of Transition 21, 17–51.
Zeng, T., 2011, Ownership concentration, state ownership, and effective tax rates:
evidence from China’s listed firms, Accounting Perspectives 9, 271–289.
Zhang, W. Y., 2006, China’s SOE reform: a corporate governance perspective,
Corporate Ownership and Control 3, 132–150.

© 2013 AFAANZ