Tax Aggressiveness, Tunneling and Firm Value: Interactive Effect of Corporate Governance in Business Groups

Abstract

This study extends the literature on tax aggressiveness (TA) from agency perspectives in the rarely discussed case of group firms. More specifically, the study investigates the relationship between firms TA, tunnelling and value of firm. Moreover, the study also investigates the impact of the moderating role of corporate governance (CG) in counterfeiting the conflicts of interests in group firms. For this purpose, sample data of 160 non-financial Pakistani firms belonging to groups for the period from 2009 to 2018 is analyzed through two Stages Least Square Regression (2SLS) models. The findings reveal that tunneling, group ownership and managerial ownership show direct association with TA. While CG agents, board and audit committee independence and external audit quality exhibits an indirect relationship with TA. Moreover, the tunneling-related TA has a negative effect on the firm value. However, the estimated interaction effects show that CG mitigates this negative relationship between the tunneling-related TA and firm value. Thus, good CG ameliorates the expropriations by the controlling shareholders and TA becomes a value enhancing activity in business groups. Keywords: Tax Aggressiveness, Firm Value, Business Groups, Corporate Governance, External Audit Quality

Corporate Tax Policy: Impact Tunnelling Incentive, Debt Covenant, And Transfer Pricing

“…Likewise (Rifan, 2019;Tang, 2016) explain that tunnelling incentives are used by management in corporate tax policy. The higher value of the tunnelling incentive indicates the high influence of majority shareholders on management, so that with this power it causes a lot of input and even encouragement in every management policy, including tax policy, with the main objective of getting more profit for the majority shareholder (Rohmani and Amin, 2022;Suripto and Novitaria, 2021;Ullah et al, 2021).…”