Financial Market Internationalization of and Corporate Tax Avoidance: Evidence from the Inclusion of Chinese A-Shares in the MSCI-EMI

This paper aims to contribute to the existing literature by investigating the impact of financial market internationalization, specifically the inclusion of Chinese A-shares in the MSCI Emerging Market Index (MSCI-EMI), on corporate tax avoidance behavior. The study focuses on a target population of 968 firms listed between 2014 and 2021 that are part of the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs. A propensity score matching (PSM) combined with a difference-in-differences (DID) design was employed, with 236 firms included in the MSCI-EMI as the treatment group on June 1, 2018, and the remaining 732 firms forming the control group. The analysis examines any divergence in tax avoidance behavior between these two groups resulting from the inclusion in the MSCI-EMI. The findings reveal that the inclusion of A-shares in the MSCI-EMI significantly curbs corporate tax avoidance, particularly among firms characterized by low information transparency, minimal analyst attention, limited media coverage, or high financing costs. These results remain robust after conducting parallel trend tests, placebo tests for causal inference, single-stage analysis, and endogeneity tests. The findings underscore the importance of ongoing government efforts to enhance information transparency, expand financing channels, and further promote capital market reform to effectively reduce corporate tax avoidance behavior.