Financial constraints, Tax enforcement and Tax avoidance: Evidence from the Chinese Listed Firms

When the external financing cost is too high, and the internal cash flow of the enterprise is insufficient, the enterprise has to give up some valuable investment activities, and then the enterprise faces the dilemma of financial constraints. Tax avoidance can reduce not only corporate tax obligations but also reduce cash flow expenses. Therefore, there may be stronger tax avoidance motives when companies face financial constraints. This paper selects the Chinese listed companies as the research sample, and conducts an empirical test on the proposed hypothesis. We find that the financial constraints of the overall Chinese listed companies are significantly positively related to tax avoidance. Moreover, the correlation between financial constraints and tax avoidance mainly exists in areas with a low level of tax enforcement. That is, financing-constrained enterprises will choose tax avoidance to improve the shortage of funds, and tax enforcement can effectively curb tax avoidance caused by financial constraints