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Cultural Diversity and Corporate Tax Avoidance: Evidence from Chinese Private Enterprises

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Abstract

We examine the impact of a city’s cultural diversity on a firm’s tax avoidance (TA). Our findings suggest that when a firm is located in a culturally diverse city, it exhibits less TA than a firm located in a less culturally diverse city. The findings are robust to alternative metrics of cultural diversity and TA and after accounting for omitted sample bias and endogeneity. Additional analysis suggests that the negative impact of cultural diversity on a firm’s TA is more salient in a firm with strong managerial incentives or in a city that is characterized by more migration. Furthermore, we document that the negative impact of cultural diversity on TA is more pronounced when firms face strong financial constraints or effective internal and external monitoring.

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Notes

  1. The mean and median of BTD are different from those in Xia et al. (2017). We attribute the difference due to four reasons: (1) our sample is from 2007–2017 while theirs is from 2000–2014, (2) we use only non-SOEs and they include all firms, and (3) Xia et al. (2017) follow Kim et al. (2011) method while we use Manzo and Plesko (2002) method to calculate BTD.

  2. We compare the means and medians of the full sample and the reduced sample. The dependent variable (BTD) and explanatory variables (DIVERSITY1 and DIVERSITY2) do not exhibit significant differences between the full and reduced samples.

  3. The data for the mountainous terrain in and around a city (QFDU) are from Feng et al. (2007). In Feng et al., they use the geographical information system method to examine a 1 to 1 million mountainous terrain model. Based on a 10 km by 10 km window (a piece of land) and using 500 m as the standard height, they assign a value of n to the piece of land if a window has n times of 500 m.

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Funding

This work was supported by the National Natural Science Foundation of China [Nos. 71702102, 71472041].

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Authors and Affiliations

  1. School of Business, University of International Business and Economics, Beijing, China

    Guangyong Lei & Wanwan Wang

  2. China Institute for Urban Governance\School of International and Public Affairs, Shanghai Jiao Tong University, Shanghai, China

    Junli Yu

  3. Western Kentucky University, Bowling Green, USA

    Kam C. Chan

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  1. Guangyong Lei
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Appendices

Appendix A: Variable Definitions

This appendix presents the definitions of all variables.

Variable

Definition

BTD

BTD = ((pretax accounting profit − taxable income) / total assets) *100; taxable income = (income tax expense − deferred income tax expense) / nominal income tax rate

DIVERSITY1

The number of sub-Chinese dialects in one city

DIVERSITY2

The dialect differentiation index from Xu et al. (2015)

ROA

The ratio of net income to total assets in a given year

SIZE

The natural logarithm of total assets at the end of the year

LEV

Ratio of total liabilities to total assets at the end of the year

GROWTH

One-year percentage change in sales

TANGIBLE

The ratio of tangible assets to total assets at the end of the year

TOP

Percentage of shares held by the largest shareholder at the end of the year

AGE

The natural logarithm of one plus the number of listing years for a firm

DUAL

If the same individual is the CEO and chairman of the board, the value is 1 and zero otherwise

EQINC

The ratio of income from investment to total assets at the end of the year

INTANG

The ratio of intangible assets to total assets at the end of the year

LOSS

If a firm reports negative net earnings in previous year, the value is 1 and zero otherwise

PC

If any manager of a firm is a former or current government officials, deputies to the National People’s Congress, party representatives or PPCC members, then the value is 1 and zero otherwise

MARKET

Marketization index of a province from Wang et al. (2019)

UNCERTAINTY

It takes a value of 1 if the governor or communist party secretary changes in a province in which a firm located in a given year; and zero otherwise

Appendix B. Propensity Score Matching (PSM) Covariate Balance Checks

This appendix presents the results for the covariate balance checks of PSM. See Tables 14 and 15.

Table 14 The covariate balance checks of PSM (using two dialects as cut-off to be treatment group)
Full size table
Table 15 The covariate balance checks of PSM (using three dialects as cut-off to be treatment group)
Full size table

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Lei, G., Wang, W., Yu, J. et al. Cultural Diversity and Corporate Tax Avoidance: Evidence from Chinese Private Enterprises. J Bus Ethics 176, 357–379 (2022). https://doi.org/10.1007/s10551-020-04683-2

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