Market liberalization and tax avoidance: Evidence from the Shanghai-Hong Kong Stock Connect Program in China

•We investigate how market liberalization shapes firm’s tax avoidance.•After market liberalization, pilot firms reduced tax avoidance by about 13.1%.•The impact of market liberalization on tax avoidance is stronger in non-state-owned firms.•The reducation of tax avoidance is more pronounced in firms with external monitoring, higher information asymmetry, and stronger financial constraints. This study employs two market liberalization programs in China, the Shanghai-Hong Kong Stock Connect (SHSC) program and the Shenzhen-Hong Kong Stock Connect (SZHSC) program, as an exogenous shock to stock market liberalization to explore the impact of market liberalization on tax avoidance. By employing the staggered difference-in-difference regression on Chinese listed firms, we found that market liberalization reduces tax avoidance by approximately 13.1%. This result is robust under parallel trend examination, falsification test, alternative regression methodology, and different measurements for tax avoidance. Additionally, this effect is greater for non-state-owned firms and for firms that have less external monitoring, higher information asymmetry, and stronger financial constraints.