Tax Administration Digitization as a Governance Tool: Evidence From Controlling Shareholder Expropriation

Abstract

Research Question/Issue This study investigates whether tax administration digitization curbs controlling shareholder expropriation by enhancing transparency and reducing tax avoidance. Research Findings/Insights Drawing on a quasi‐natural experiment from China's phased implementation of tax administration digitization, we find that tax administration digitization significantly curbs controlling shareholder expropriation. Path analysis indicates that this effect is transmitted through reduced information asymmetry and lower tax avoidance, with information asymmetry serving as the dominant channel. The effect of tax administration digitization is particularly strong for firms with higher ownership concentration, lower institutional ownership, CEO duality, greater separation of cash flow and control rights, lower managerial ownership, as well as in nonstate‐owned enterprises and firms operating in environments with weaker formal and informal institutions. Theoretical/Academic Implications This study advances the literature on tax policy as a corporate governance mechanism, demonstrating that tax administration digitization functions as an external governance tool that reduces agency conflicts between controlling and minority shareholders. It also integrates political cost theory and agency theory to explain how digitized regulatory scrutiny shapes controlling shareholders' incentives. Practitioner/Policy Implications Amid the global shift toward digital tax enforcement, our findings provide practical insights for regulators and policymakers, emphasizing the broader governance benefits of tax digitization. Tax authorities and investors should consider the governance spillover effects of tax administration digitization on corporate transparency and minority shareholder protection, particularly in jurisdictions with weaker legal enforcement.