How Aggressive Tax Planning Facilitates the Diversion of Corporate Resources: Evidence from Path Analysis

ABSTRACT In measuring tunneling with intercorporate loans disclosed by Chinese listed companies, we analyze the underlying channels through which aggressive tax planning facilitates the diversion of corporate resources by firm insiders. Using path analysis, we document that the path from tax aggressiveness to related loans is mediated by both the additional cash flows from tax savings and the increased financial opacity from tax planning, and that additional cash flows plays a much more important role than opacity in helping controlling shareholders to divert corporate resources under the guise of tax aggressiveness. Beyond the two mediated paths, we also detect a residual, direct path from tax aggressiveness to related loans. After an exogenous shock from the government crackdown on diversionary related loans, we find the direct path is fully mediated by the two indirect paths, suggesting that tunneling via related loans only occurs at firms where insiders can mask tunneling under the cover of opacity or can justify related loans on grounds of abnormal cash flows from tax savings. Our evidence supports the notion that greater outside scrutiny increases the hurdle for, but does not entirely eradicate, diversion facilitated by tax aggressiveness. Collectively, our research lends some support to recent theory on the importance of taxes to corporate governance by demonstrating how the agency costs of tax planning allow certain shareholders to benefit from firm activities at the expense of others. RÉSUMÉ En quoi la planification fiscale audacieuse facilite le détournement des ressources de l'entreprise : observations tirées d'une analyse des pistes causales Les auteurs, qui utilisent les prêts entre apparentés présentés par les sociétés chinoises cotées pour évaluer la tunnelisation, analysent les canaux par l'intermédiaire desquels la planification fiscale audacieuse facilite aux initiés le détournement des ressources de l'entreprise. Au moyen d'une analyse des pistes causales, ils démontrent que le lien entre l'audace des positions fiscales et les prêts à des apparentés passe à la fois par les flux de trésorerie supplémentaires provenant des économies fiscales et par l'opacité financière accrue qu'entraîne la planification fiscale, et que ces flux de trésorerie supplémentaires contribuent beaucoup plus largement que l'opacité financière à la capacité des actionnaires de contrôle de détourner les ressources de l'entreprise sous le couvert de l'audace des posi