Local gambling preferences and corporate tax avoidance: Evidence from China

Abstract

We document the positive effect of local gambling preferences on corporate tax avoidance using province‐level lottery sales data as a proxy for local gambling preferences. This result is robust to a battery of sensitivity tests. Furthermore, the positive effect of local gambling preferences on corporate tax avoidance is weaker (stronger) when firms face stronger (weaker) tax enforcement, have greater (less) institutional ownership, and followed by more (less) analysts. Last, we find that local gambling preferences influence corporate tax avoidance by shaping the risk attitudes of insiders (i.e. controlling shareholders and managers). Overall, we shed light on the real effect of local gambling preferences on corporate tax avoidance behaviour in emerging economies such as China.