Does the Use of Special Purpose Entities Affect Firm Value? Evidence from Indonesian Listed Nonfinancial Firms

Abstract

This objective of this paper is to examine the effect of the use of special purpose entities (SPEs) on firm value. Applying a multiple regression analysis on a sample of 124 Indonesian listed nonfinancial firms during the year 2015 and using Tobin's Q ratio as a proxy for firm value, this paper finds a positive relation between the use of SPEs and firm value. The results show that the effect of the use SPEs on firm value is statistically and economically significant, where firms that use SPEs have a 21.52% higher value than firms that do not use SPEs. The sources of higher firm value might result from lower cost of capital, higher after-tax cash flows, and increased information value of reported earnings associated with the use of SPEs to serve tax planning, financing, and financial reporting objectives.

Corporate tax planning, the use of SPV, board independence, and firm value

“…Therefore, the additional value from the use of SPVs might result from their use either for financing strategy purposes, corporate tax planning activities, achieving certain earnings management objectives, or all of the aforementioned purposes. In other words, the results in Suriawinata (2019) do not specifically identify the sources of additional firm value resulting from the use of SPVs.…”

“…On the value relevance of the use of SPVs, Suriawinata (2019) finds evidence of a positive relationship between the use of SPVs and firm value. However, Suriawinata (2019) investigates the value impact of the use of SPVs in a more general context, based on the assertion that firms use SPVs to obtain a lower cost of external financing, reduce global taxes, and manage reported earnings. Therefore, the additional value from the use of SPVs might result from their use either for financing strategy purposes, corporate tax planning activities, achieving certain earnings management objectives, or all of the aforementioned purposes.…”

“…Motivated by the assertion that firms use SPVs to attain lower costs of financing, reduce global taxes, and manage reported earnings, a prior study by Suriawinata (2019) shows that the use of SPVs enhances firm value. However, the source of additional value from the use of SPVs in Suriawinata (2019) cannot be specifically identified.…”