Information acquisition and tax avoidance: Evidence from a natural experiment

AbstractAnalyzing the launch of high‐speed rail (HSR) services in China as a natural experiment, we identify a positive externality stemming from lower information acquisition costs: the reduction in firms’ overinvestment in tax avoidance. Specifically, we find that outsiders undertake more corporate site visits and firms engage in less tax avoidance after the opening of HSR lines in the cities where these firms are located, leading to enhanced firm value. In another result consistent with expectations, we document that the impact of the introduction of HSR lines on tax avoidance is concentrated in firms in which insiders exhibit a high propensity to extract rents through aggressive tax strategies. Our results imply that more efficient transportation facilitates site visits and the acquisition of firm‐specific information, particularly soft information. This improvement strengthens external monitoring, thereby limiting the ability of insiders to accumulate private benefits under the guise of tax avoidance that benefits all shareholders as the residual claimants.