Industry and geographic peer effects on corporate tax avoidance: Evidence from China

Abstract This study examines industry and geographic peer effects on tax avoidance as well as their mechanisms and economic consequences in an emerging market, China. Using an instrumental variable approach and after considering a variety of robustness tests, we document causal evidence that a firm’s degree of tax avoidance is positively affected by the average degree of tax avoidance of its peer firms in the same industry or province. Further analyses show that both industry and geographic peer effects are driven by the motives of information learning and market competition and depend on the degree of local tax enforcement and executive tax expertise. We also document preliminary evidence that both industry and geographic peer effects benefit firms by improving their investments, dividend payouts, and future performance.