Nexus between profitability, firm size and leverage and tax avoidance: evidence from an emerging economy

Abstract

PurposeThis study examines the impact of profitability, firm size and leverage on corporate tax avoidance in Bangladesh, an emerging South Asian economy.Design/methodology/approachA balanced panel data of 62 firms from Dhaka and Chittagong stock exchanges in Bangladesh from 2009 to 2020 were used to run the regression. This study employed the fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) to examine the hypotheses.FindingsThe findings show that large firms positively impact corporate tax avoidance. Similarly, profitability and leverage are positively associated with tax avoidance, and the results are significant. Furthermore, the study conducts robustness tests that confirm the findings.Research limitations/implicationsThe use of cash effective tax rate (ETR) to investigate firms’ tax avoidance practices poses some limitations, and the results should be interpreted cautiously.Practical implicationsThe current study may help policymakers better enhance tax collection from business firms. The findings could serve as a valuable input for effectively monitoring tax collection from large profit-earning firms.Originality/valueTo the authors' best knowledge, this is the first historical attempt in Bangladesh to use panel data to examine the relationship between the firm’s level characteristics and corporate tax avoidance. Panel data often provides greater flexibility with large data, simplifying calculation and statistical analysis.