Politically Connected Independent Directors and Effective Tax Rates in China

Abstract

This paper empirically investigates politically connected independent directors in Chinese public firms using 200 state-owned enterprises (SOEs) and 200 non-SOEs from 2002–2014. We find that, in general, firms with politically connected independent directors have higher effective tax rates than firms without such directors. We argue this is because that politically connected independent directors work for the interests of the government and restrict firms’ tax planning activities. Additionally, the effect of politically connected directors on tax rates is weaker in SOEs than in non-SOEs, possibly because of the redundancy of the political ties that both independent directors and ownership bring in SOEs. Our study reveals the potential cost of political connections that prior studies have overlooked.