Do multiple large shareholders affect tax avoidance? Evidence from China

We examine the collusion versus monitoring effects of multiple large shareholders (MLS) on firms' tax avoidance (TA). MLS can enhance the monitoring of the top shareholder and executives to restrain agency problems, or they can collude with the top shareholder to exacerbate the expropriation of minority shareholders. Using a sample of Chinese firms, we find that firms with MLS engage in less TA than their non-MLS counterparts do, supporting the monitoring hypothesis. The findings are robust after accounting for endogeneity concerns. Further tests show that the impact of MLS on TA is more pronounced when MLS have stronger power and when firms have severe agency problems. In addition, we find that effective external corporate governance can substitute for the monitoring effects of MLS. Most importantly, we find that TA activities are more likely to enhance value with the monitoring of MLS. In sum, our findings are consistent with the literature indicating that MLS make a positive contribution to firm value by reducing the nontax costs of TA.