Cultural Diversity and Corporate Tax Avoidance: Evidence from Chinese Private Enterprises

Guangyong Lei, Wanwan Wang, Junli Yu, Kam C. Chan

Journal of Business Ethics · 2022 · Volume 176 · Issue 2

Abstract

We examine the impact of a city’s cultural diversity on a firm’s tax avoidance (TA). Our findings suggest that when a firm is located in a culturally diverse city, it exhibits less TA than a firm located in a less culturally diverse city. The findings are robust to alternative metrics of cultural diversity and TA and after accounting for omitted sample bias and endogeneity. Additional analysis suggests that the negative impact of cultural diversity on a firm’s TA is more salient in a firm with strong managerial incentives or in a city that is characterized by more migration. Furthermore, we document that the negative impact of cultural diversity on TA is more pronounced when firms face strong financial constraints or effective internal and external monitoring.

Keywords

Cultural diversity, Tax avoidance, Financial constraints, Monitoring, Risk cognition, Urban governance

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