The Firm Life Cycle Dynamics of Tax Avoidance

Abstract

This paper aimed at finding out whether tax avoidance differed across firm life cycle (FLC). We used cash flows pattern as a proxy to identify FLC into 4 phases, namely introduction, growth, mature, and decline. Tax avoidance was measured using effective tax rate (ETR) to show the impact of this practice on net income. Each FLC phase had different characteristics and hence explained its dynamics to implement tax avoidance in every stage. As a part of firms' important strategy, tax avoidance decision would consider resource allocation across FLC phases. We constructed a dataset of Indonesia publicly listed manufacturing firms which were classified as basic industries and chemicals sectors. We used a final sample of 56 companies with an 8-year research period and found that tax avoidance practice varied along FLC phases. Based on the 448 firm-year observations, this study found that firms significantly positively engaged with tax avoidance in introduction and decline stages while significantly negatively engaged in growth and mature stages. These results indicate the extent of FLC phases in explaining firms' tendency to be involved in tax avoidance and thus useful for predicting current and future potential tax.

The mediating mechanism of earnings management on the relationship between life cycle and financial reporting quality: Finding from MRA and fsQCA

“…Hasan et al (2017) implied that tax avoidance is positively related to the decline stage. The same results were found in the study of Mangoting and Onggara (2019). In addition, poor matching of revenues with expenses was found in the firms suffering a downturn.…”

Do Life Cycles Affect Financial Reporting Quality? Evidence from Emerging Market

“…According to their results, while tax avoidance is positively associated with introduction and decline stages, the authors observed a negative association with growth and mature stages when the shake-out stage is the benchmark. Mangoting and Onggara (2019) report similar results for tax avoidance and life-cycle stages. The authors state that tax avoidance is significantly positive in the introduction and decline stages and significantly negative in growth and mature stages.…”

Does the life cycle affect earnings management and bankruptcy?

“…Gross profitability is developing to a similar extent, which is the lowest in the early and ending stages of the life cycle. After reaching the top financial performance (at the stage of maturity) with maximum profitability, companies reduce the reported profit mainly for the purpose of tax avoidance in conflict with the results of Mangoting and Onggara (2018). Nevertheless, Drake (2015) argued in connection with this that mature companies have less persistent earnings and a higher difference between book and taxable income, which is reflected in downward earnings management.…”