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This paper examines the impact of corporate tax avoidance on firms’ financial performance. China is the country of focus because of its unique reform experience. The results using structural equation modeling (SEM) show that there is a significant negative direct relationship between tax avoidance and market value. It indicates that the opaque nature of China’s stock market creates ‘opportunities’ for managers using tax avoidance as an instrument to engage in rent seeking activities, which hurt shareholders’ value. However, this study also finds significant positive indirect relationships between tax avoidance and market value as it has stimulated firms’ growth and increase in profitability as the additional after-tax cash arising from tax avoidance has helped expand the firm’s market value. The results imply that tax avoidance can be a value-adding activity but for firms to appropriate its advantages, there is a need to strengthen internal supervision and management capability. Additionally, the State Administration of Taxation of China should enhance the legal provisions to prevent managerial rent extraction.
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