Abstract

This study aims to investigate three crucial questions. First, whether the corporate governance leads to sustainable tax strategies or not? Second, whether the higher earnings quality leads to sustainable tax strategies or not? Third, whether the corporate governance mediates the relationship between the higher earnings quality and sustainable tax strategies or not? Does corporate transparency and/or accounting transparency affect firms implementing sustainable tax strategies? Although prior research came up with indirected evidences such as positive (e.g., Neuman et al. 2013；Park et al. 2015). Thus, we directly investigate whether the sustainability of firms’ tax strategies is positively associated with corporate governance and higher financial reporting quality (i.e., earnings quality), and the mediating role of corporate governance on the relationship between earnings quality and sustainable tax strategies. To measure sustainable tax strategies, following McGuire et al. (2013), we calculate the coefficient of variation of annual Cash (GAAP) ETRs as measures over the three－year period, t－2 to t. To measure earnings quality, following Jeon and Park (2019), we use opaque financial reports (i.e., OPAQUE～OPAQUE4) are grounded in accrual－based and real earnings management activity for lower financial reporting quality as measures over the three－year period, t－2 to t. In this study, we used the ESG (environment, social, and governance) evaluation data as a proxy for corporate governance provided by the Korea Corporate Governance Service (i.e., KCGS). We used the sample 3,380 firms listed on Korea Securities Exchange for the period 2011－2019. The empirical results are as follows. First, we do not find evidence that corporate governance is positively linked to firms implementing sustainable tax strategies. Second, we find that higher earnings quality is positively linked to firms implementing sustainable tax strategies. Third, we do not find evidence that corporate governance mediates the link between higher earnings quality and sustainable tax strategies. In sum, our study found that the higher earnings quality rather than sound corporate governance positively influence firm’s sustainable tax strategies. Thus, this paper contributes to the corporate governance, earnings quality, and sustainable tax strategies related literature by bridging the gap that exists in three literatures. Furthermore, our study contributes to corporate governance, earnings quality, and tax literatures by being the first to examine the economic cause of firms implementing sustainable tax strategies in the context of corporate governance and high financial reporting quality. Specially, our results also provide new evidence to the sustainable tax strategies in prior research. In addition, the findings of this study also have certain implications for the managers, regulators and policymakers as it clarifies the link among main aspects of firms to engage in more sustainable tax strategies.

Keywords

• Sustainable tax strategies
• Corporate governance
• Higher earnings quality
• Opaque financial reports

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