Investment Opportunity Set,Capital Market Pressure And Tax Avoidance

A firm’s investment opportunity set is a unique construct that is comprised of the potential for investments in future projects as well as overall growth in past and current projects and their expected payoffs. Companies with more investment opportunities will lead to information asymmetry, because investment decisions are made by managers’discretionary investment choices, which are difficult to predict and monitor. So, the agent’s investment decisions may be contrary to the goal of enterprise value maximization. Because information asymmetry is a necessary condition for more aggressive forms of tax avoidance, if more investment opportunities will lead to greater information asymmetry, mangers of companies with more investment opportunities are more likely to be involved in tax avoidance activities due to less risk.High investment opportunity will increase the information asymmetry, bring the risk of moral hazard and adverse selection and weaken the regulation effect of management. Besides, for the consideration of the opportunism, the agents will make tax avoidance more aggressive.By achieving the expected return of the market, mangers would rather give up the long-term interests, and choose the projects that can quickly bring report earnings to the company, which also affects their business decisions. Corporate tax departments are viewed as a profit center in many firms and tax directors are incentivized to generate tax savings for the firm.Therefore, the particularity of tax avoidance can achieve the goal for managers to meet capital market expectations. Thus, tax avoidance activities become an effective means to achieve this goal. At the same time, studies have found that managers in the face of capital market pressures were more likely to be risk appetite. So, faced with significant capital market pressure,even in the presence of certain regulatory risk and tax risk,companies still tend to invest in tax avoidance activities.Above all, we predict that firms with high investment opportunity set are more likely to invest in tax shelters. Besides,facing significant capital markets pressure,companies with more investment opportunities are tend to invest in tax avoidance activities.Based on the principal-agent theory, using a sample of Chinese listed companies during the period of 2008-2013,we find that investment opportunity set is positively related to corporate tax avoidance,and in the face of significant capital market pressure, companies with large investment opportunity set will be more likely to invest in tax avoidance activities.