Saving or tunnelling: value effects of tax avoidance in Chinese listed local government‐controlled firms

This paper investigates the value effect of tax avoidance and its underlying mechanisms among Chinese listed local government‐controlled (LG) firms. We show that tax avoidance does not promote firm value in LG firms with government ownership smaller than 40 percent and the above negative tunnelling effect is more pronounced when the control rights are concentrated in the local government and weaker when other large shareholders can act as a countervailing force. Finally, we observe a positive relation between tax avoidance and related‐party transactions as well as overinvestment, again indicating a tunnelling effect in LG firms with government ownership smaller than 40 percent.