Ownership, tax and intercorporate loans in China

Research output: Journal PublicationArticlepeer-review

3 Citations (Scopus)


Purpose: This paper aims to investigate the interconnections between corporate ownership, tax system and controlling shareholder tunneling through intercorporate loans in an emerging market setting. Design/methodology/approach: China’s Enterprises Income Tax reform in 2008 abolished its previous multiple-tiers tax system under which foreign direct investment (FDI) firms enjoyed preferential tax rates than domestic firms by introducing a new unified-rate tax system. Using difference-in-differences tests, the author analyzes changes of controlling shareholders tunneling through intercorporate loans among Chinese listed companies around this reform. Findings: The author documents significant reductions of intercorporate loans after the reform. More importantly, the author reveals that foreign-invested firms experienced larger reductions of intercorporate loans than domestic firms. The author also shows that state association matters for domestic firms’ response to the reform. In addition, the author documents positive stock market reaction to the tax reform announcement for firms that exhibited higher level of tunneling prior to the reform, indicating market expectation of reduced principal-principal conflict post-reform. Research limitations/implications: The findings suggest effective corporate governance system is warranted to constrain intercorporate fund transfers in emerging markets where tax incentives are used for attracting inward foreign direct investments. Institutional reforms in emerging markets aimed at removing market frictions can alleviate the problem of controlling shareholder expropriations of minority interests or tunneling. Originality/value: This is a pioneering study that reveals the role of tax as a public governance mechanism in weak minority investor protection environment.

Original languageEnglish
Pages (from-to)111-129
Number of pages19
JournalInternational Journal of Accounting and Information Management
Issue number1
Publication statusPublished - 4 Mar 2019


  • China
  • Intercorporate loans
  • Ownership structure
  • Tax

ASJC Scopus subject areas

  • Management Information Systems
  • Accounting
  • Economics, Econometrics and Finance (all)


Dive into the research topics of 'Ownership, tax and intercorporate loans in China'. Together they form a unique fingerprint.

Cite this