Tax Avoidance and Corporate Transparency
Asian Tax Journal Vol. 20 No. 2 (2019), pp. 95-123
Abstract
Tax avoidance has been found to contribute to corporate value by increasing after－tax cash flows. However, recent agency theory based studies argue that tax avoidance can create agency problems and information asymmetry, negatively impacting corporate value. The empirical results of the negative relationship between tax avoidance and corporate value are hard to find. This study analyzed the unclear information environment as a factor affecting the negative relationship between tax avoidance and firm value. This study examined the effect of tax avoidance on corporate transparency in order to verify the hypothesis. Tax avoidance measures are effective tax rates(ETRs) were used. The corporate transparency measure used analyst coverage, spread, annual stock turnover, and accrual quality. The transparency index was constructed by standardizing the sum of the deciles of these individual elements. The analysis period is from 2001 to 2014. The empirical results are as follows. First, in the analysis using transparency index, corporate transparency decreased as tax avoidance increased. Second, in the analysis of individual components, analyst coverage, spread, and accrual quality show a negative (－) relationship with tax avoidance. The higher the tax avoidance, the lower the quality of financial reporting and the greater the information asymmetry. The two results are consistent with all tax avoidance measures. This study can be distinguished in that the transparency index is constructed to evaluate the comprehensive level of corporate transparency and the relationship between tax avoidance and corporate transparency are analyzed directly. The results of this study are contrary to the traditional view of tax avoidance. According to the agency theory perspective on corporate tax avoidance, aggressive tax avoidance negatively affects the information environment, thus providing empirical evidence that it increases non－tax costs. The contribution can be found in that it provided a meaningful explanation of the negative relationship between tax avoidance and firm value.
Keywords
- tax avoidance
- corporate transparency
- information asymmetry
- analyst
- spread
Related Articles
The Effect of the Information Content of Earnings after Mandatory IFRS Adoption on Financial Analysts’ Earnings Forecast Accuracy
19(3) 119-163
Firm Risk in Audit Report and Tax Avoidance：Focusing on the Role of Financial Analysts
24(2) 117-153
The Influence of Overvalued Equity on Overinvestment and its Relation to Financial Reporting Quality’s Effect
22(2) 91-132
The Effect of Accruals Quality on Credit Rating and Cost of Debt －Focus on the Innate and Discretionary of Accruals Quality－
19(4) 9-48
The Effect of Accruals Quality on Corporate Lawsuits －Focused on the Innate and Discretionary Components of Accruals Quality－
19(2) 165-208