The Effect of Foreign Institutional Ownership on Corporate Tax Avoidance: International Evidence

Date
2017-08-23
Authors
Hasan, Iftekhar
Kim, Incheol
Teng, Haimeng
Wu, Qiang
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Abstract
We find robust evidence that foreign institutional investors are negatively associated with their investee firms’ tax avoidance. To mitigate endogeneity concerns, we apply three identification strategies. First, we implement a two-stage least squares model. Second, we perform a difference-in-differences analysis by exploiting China’s legal reform, Qualified Foreign Institutional Investors program, as a quasi-natural experiment. Third, we compare changes in corporate tax avoidance in response to a significant increase in FIIs. We further find that the negative association is dominated by FIIs from countries with high tax morale and FIIs from countries with strong shareholder protection. Finally, we find that the extent of tax morale and shareholder protection in the country where an investee firm is located also matters. We conclude that FIIs play an active role in shaping investee firms’ corporate tax avoidance policy.
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Keywords
Tax Avoidance, Foreign Institutional Ownership, Tax Morale, Shareholder Protection
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