Institutional Investors’ Shareholding And Corporate Tax Avoidance

Under the modern corporate structure characterized by the separation ofownership and management, the agency cost arising from tax avoidance cannot beignored. With the growing of institutional investors in China and development ofshareholder activism, institutional investors may actively constrain corporate taxavoidance to curb the agency cost. Thus through investigating the relationshipsbetween the whole and main institutional investors’ shareholding and corporate taxavoidance, this study tries to find out whether and how institutional investorsinfluence corporate tax avoidance.Using a sample of listed companies in Chinese A stock market from2009to2011,through investigating the relationship between institutional investors’ shareholdingand corporate tax avoidance, this study finds that:(1) higher the whole institutionalinvestors’ shareholding is significantly related with lower corporate tax avoidance;(2)to the contrary and expectedly, higher fund shareholding is significantly related withhigher corporate tax avoidance, and the circumstance is the same for other maininstitutional shareholding. These results reveal that institutional investor heterogeneityinfluences the way investors treat corporate tax avoidance. And explanations for theopposite correlations may be that: currently institutional investors still view corporatetax avoidance in the traditional way and overlook agency cost, they show aversion torisks, and want less tax avoidance; along with the ultra-fast development of fund andother main institutional investors is the short term investment behavior, they do notcare about the long term agency problem and encourage corporate tax avoidance.Finally, suggestions are raised for regulators to better address the corporate taxavoidance agency problem while developing institutional investors: increasesupervision to regulate the short term investment behavior, continue to expandinstitutional investors, foster a long term investment idea in the institutional investors.