Preventive regulation and corporate tax avoidance: Evidence from China

Abstract This study examines whether and how preventive regulation impacts corporate tax avoidance in China, using the random inspection of accounting information quality (RIAIQ) by the Ministry of Finance (MOF) as a quasi‐natural experiment. Our staggered difference‐in‐differences estimates indicate that improving preventive regulation through the MOF's RIAIQ can inhibit corporate tax avoidance, especially for firms with tax issues, disclosed specific noncompliance amounts, stronger external supervision, lower marketisation level, and middle nominal tax rates. Mechanism tests demonstrate that preventive regulation diminishes corporate tax avoidance activities by mitigating managerial agency conflicts and intergovernmental agency conflicts in the decision‐making process. Our findings highlight the governance role of preventive regulation in constraining corporate tax avoidance.