Do Non‐SOEs Engage in Less Tax Avoidance When the Government Is a Minority Shareholder in China?

This study attempts to shed new light on how the state, as a minority shareholder, can affect the tax planning of non‐state‐owned enterprises (non‐SOEs). We examine publicly traded non‐SOEs in China and find that non‐SOEs engage in more tax avoidance when the government is a minority shareholder, indicating that minority state ownership has had a ‘shelter effect’ on tax avoidance of non‐SOEs. Further analysis shows that the sheltering effect of minority state ownership is more prominent for firms located in areas with heavier social burdens, worse tax enforcement and firms with stronger incentives to avoid taxes. Furthermore, non‐SOEs with minority state ownership increase excessive capital expenditures and employ redundant employees but still have higher firm value. Overall, our findings suggest the state, as a minority shareholder, shapes the tax‐planning activities of non‐SOEs in a ‘two‐way favour exchange’ manner and it is beneficial for non‐SOEs to maintain a close relationship with the government in China, where the government controls key resources.