Bank competition and corporate tax avoidance: the Chinese experience

• Examines bank competition’s effect on tax avoidance using China’s 2009 deregulation. • Reveals decreased corporate tax avoidance after bank entry deregulation. • Links this deterrence to banks’ higher information demands and credit supply. • Finds heterogeneous effects across firm characteristics. We examine the effect of bank competition on non-financial firms’ tax avoidance in the context of China, where a new national policy on bank entry deregulation in 2009 increased bank competition. The findings suggest that corporate tax avoidance decreases after bank entry deregulation. This deterrence effect partially stems from banks’ increased information expectations and the greater availability of credit. Moreover, the restraining effect is more salient for non-financial firms subject to less bank monitoring, weaker external or internal monitoring, greater financial constraints, less access to credit, and high levels of internationalization. Overall, our findings shed new light on how bank competition shapes firms’ tax avoidance strategies.