ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Effect of Corporate Governance on the Relationship between Tax Avoidance and Earnings Management

  • Kim SeonMi Chonnam National University
  • Yoo, Seung-Weon Korea University
  • Jun Yeung Hong Hanbat National University

Asian Tax Journal Vol. 21 No. 5 (2020), pp. 193-220

Abstract

The purpose of this study is to analyze whether the impact on tax avoidance and earnings management is different depending on the level of corporate governance. Four measures were used as measures of tax avoidance which are the difference between accounting income and taxable income(BTD), the method of Desai and Dharmapala(2006)(DD_BTD), cash effective tax rate (CashETR), and effective tax rate(ETR). And performance matched discretionary accruals(PMDA) is used as a measure of earnings management according to Kothari et al.(2005). The level of corporate governance was measured by corporate governance level announced every year by Korea Corporate Governance Service(KCGS) for listed firms in Korea. By using Korean firms listed on KOSPI from 2011 to 2018, we find that tax avoidance is negatively associated with earnings management when the level of corporate governance is high, and positively associated when the level of corporate governance is low. This result means that when the level of corporate governance is high, if the level of earnings management is high, corporate governance reduces the level of tax avoidance to avoid the risk of external audit, and if the level of earnings management is low, corporate governance increases the level of tax avoidance to take the advantage of tax avoidance. In other words, there exist substitute relationship between tax avoidance and earnings management, which means that corporate governance pursues optimal level of tax avoidance and earnings management in consideration of the total firm risk.

Keywords

  • Corporate Governance
  • Tax Avoidance
  • Earnings Management

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Asian Tax Journal

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