The effect of shareholder pressure on stakeholder interests: Evidence from corporate tax avoidance

Abstract

Research on how shareholder pressure influences the interests of stakeholders has recently witnessed a sharp increase, but yields mixed findings. We revisit this question by investigating the impact of managers' attempts to meet or beat earnings expectations on corporate tax avoidance. Using a sample of Chinese listed firms during 2005–2022, we find that firms with earnings pressure are more tax‐aggressive. Furthermore, such a higher level of tax avoidance due to earnings pressure is associated with higher real activity management. Cross‐sectional analysis shows that the effect of earnings pressure on tax avoidance is weaker among firms with better environment, society, and governance performance, but becomes more salient for state‐owned enterprises, firms with higher financial constraints, and during periods when local officials are devoid of incentives for career advancement. Taken together, our study sheds light on the consequences of shareholder pressure stemming from capital markets on corporate tax policies, and provides implications for enterprises and policymakers concerning taxation in emerging markets.