Profit-Tax Relationship, Business Group Affiliation, and External Monitoring in China
Based on a sample of Chinese listed firms, we find that the sensitivity of income tax expense to pretax income is weaker for listed firms affiliated with a top 500 business group than for unaffiliated firms. However, this sensitivity improved in the post-2008 period and in the presence of strong monitoring mechanisms by means of tax enforcement, analyst scrutiny, and long-term institutional shareholding. Our results suggest that effective external monitoring can mitigate this behavior in group-affiliated firms.
Index Terms - External monitoring; group affiliation; profit-tax relation; tax sensitivity.