Vertical interlock and corporate tax avoidance

This study examines the impact of vertical interlock on corporate tax avoidance in business groups using data on Chinese listed companies from 2003 to 2019. We find that vertical interlock has a negative impact on corporate tax avoidance. Our result is robust to alternative measures, difference-in-differences analysis, the Heckman two-stage sample selection method, an instrumental variable approach, change analysis and controlling for potential omitted variables. The impact of vertical interlock on corporate tax avoidance is more pronounced in firms with more related-party transactions and greater divergence between ownership and control rights. Overall, the findings suggest that vertical interlock exerts a significant influence on corporate tax behavior, providing insights into the ownership structure of business groups.