Political connections, business strategy and tax aggressiveness: evidence from China

Abstract

The purpose of this paper is to investigate the effects of political connections on the association between firms' business strategy and their tax aggressiveness in an emerging economy such as China. The authors study a large sample of Chinese public firms from 2011 to 2017 using a panel regression model. In addition, a change analysis, an instrument variable test and alternative measures/samples are implemented as robustness tests. Firms adopting innovative business strategy are more tax aggressive overall. However, innovative firms with political connections are less tax aggressive compared to those without political connections. This paper contributes to the understanding of firms' tax behaviors in an emerging economy setting. It suggests that there are costs associated with political connections, such as foregone tax saving opportunities, which are understudies in the prior literature.

Keywords

• tax aggressiveness
• business strategy
• political connections
• china