Tax Avoidance by Non‐Zombie Firms: Evidence From Japan Following the Lehman Shock

ABSTRACT Non‐zombie firms have an incentive to raise funds because zombie firms are prioritized for management resource allocation to prevent them from going bankrupt. Moreover, preferential loans to zombie firms are likely to hinder non‐zombie firms from raising external funds through debt. Therefore, non‐zombie firms attempt to increase internal financing through tax avoidance. This study examines whether non‐zombie firms avoid taxes, focusing on firms listed in the First Section of the Tokyo Stock Exchange (now TSE Prime) from 2008 to 2019. The results confirm that non‐zombie firms engage in tax avoidance. Given that zombie firms deter non‐zombie firms from seeking external financing, it is imperative that such firms be regulated and at the same time, the issues of zombie firms be addressed to mitigate tax avoidance behavior by non‐zombie firms. These findings indicate the need to consider the influence of other firms, such as zombie firms, in controlling tax avoidance.