Short-sale deregulation and corporate tax aggressiveness: evidence from the Chinese market

Abstract

We study whether short selling affects corporate tax aggressiveness. Exploiting staggered short-sale deregulation in the Chinese stock market as a source of variation in market pressure and monitoring, our difference-in-differences estimates show that the introduction of a short-selling scheme significantly discourages pilot firms from engaging in aggressive tax avoidance, in contrast to the findings by Luo, Ni, and Tian (2020. “Short Selling and Corporate Tax Avoidance: Insights from a Financial Constraint View.” Pacific–Basin Finance Journal 61: 101323.). We also find that the negative effect of short selling on tax aggressiveness is more pronounced for firms that have high advertising costs, high institutional holdings, and CEO duality, and are located in regions with weak tax law enforcement. We further reveal that short selling has an indirect effect on tax aggressiveness through the additional external pressure exerted by auditors, media, and financial analysts, and lastly, challenge the main analysis by Luo, Ni, and Tian (2020). Our evidence highlights the monitoring and disciplinary roles that short sellers play in determining the level of corporate tax aggressiveness.