Mediating and moderating function of corporate governance on the relationship between tax planning and tax disclosure
DOI:
https://doi.org/10.11606/issn.1982-6486.rco.2023.212129Keywords:
Corporate-governance, Accounting-standards, Voluntary-disclosure, Disclosure-readability, Corporate-financeAbstract
This study analyzes the moderating, mediating, and direct effects of corporate governance (CG) proxy mechanisms on the relationship between tax planning (TP), measured by effective tax rate components, and tax disclosure (TD). We tested the hypotheses using a 4-step hierarchical regression with Malaysian-listed non-financial companies using a balanced sample of 858 observations. We found that companies positively assessed their TP activities. Inspection of the implications of CG mechanisms as moderation on TP-TD association displayed the absence of an important constant correlated to any of the interactive variables. This makes it difficult to understand the nature of this relationship. The results illustrate the high and significant mediated impact of board compensation (BCOMS) on the TP-TD association. We further studied the sensitivity of the results and the outcomes were examined for the robustness and strength of the model specification using OLS effect estimators and the absence of TP-related factors. These test findings show no effect on the TP-TD association. This study shows that firms try to avoid taxation as far as possible by disclosing relevant tax information. These results suggest that firms express a trade-off between tax advantages and TD when choosing their TP. It meaningfully subsidizes the argument about TD concerning “comply-or-explain”, as the CG Code proposes.
Downloads
References
AbdulWahab, N. S. (2010). Tax planning and corporate governance: Effects on shareholders valuation. Thesis for the degree of Doctor of Philosophy, University of Southampton, Southampton UK. Retrieved from: http://eprints.soton.ac.uk/162801/
AbdulWahab, N. S., & Holland, K. (2012). Tax planning, corporate governance and equity value. The British Accounting Review, 44(2), 111-124.
Acock, A. C. (2013). Discovering structural equation modeling using Stata. Stata Press books.
Ahmed, K., & Nicholls, D. (1994). The impact of non-financial company characteristics on mandatory disclosure compliance in developing countries: The case of Bangladesh. The International Journal of Accounting, 29(1), 62-77.
Akerlof, G. A. (1970). The market for "lemons": Quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), 488-500.
Al-Matari, E. M., & Mgammal, M. H. (2020). The moderating effect of internal audit on the relationship between corporate governance mechanisms and corporate performance among Saudi Arabia listed companies. Contaduria y Administracion (Accounting & Management), 65(5), 1-36.
Armstrong, C. S., Blouin, J. L., & Larcker, D. F. (2012). The incentives for tax planning. Journal of Accounting and Economics, 53(1), 391-411.
Armstrong, C. S., Glaeser, S., & Kepler, J. D. (2019). Strategic reactions in corporate tax planning. Journal of Accounting and Economics.
Atwood, T., & Reynolds, J. K. (2008). The pricing of realized tax benefits from NOL carryforwards: Effect of income statement presentation. Journal of the American Taxation Association, 30(1), 1-27.
Baek, H. Y., Johnson, D. R., & Kim, J. W. (2009). Managerial ownership, corporate governance, and voluntary disclosure. Journal of Business and Economic Studies, 15(2), 44-61.
Bank Negara. (2010). ECONOMIC DEVELOPMENTS IN 2010. Retrieved from Kuala Lumpur: http://www.bnm.gov.my/files/publication/ar/en/2010/cp01.pdf
Baron, R. M., & Kenny, D. A. (1986). The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173-1182.
Bauer, A. M., Fang, J., Pittman, J., Zhang, Y., & Zhao, Y. (2019). How Aggressive Tax Planning Facilitates the Diversion of Corporate Resources: Evidence from Path Analysis. Contemporary Accounting Research.
Berkman, H., Bradbury, M. E., Hancock, P., & Innes, C. (2002). Derivative financial instrument use in Australia. Accounting and Finance, 42(2), 97-109.
Berle, A. A., & Means, G. (1937). The Modern Corporation and Private Property. New York: Macmillan.
Berle, A. A., & Means, G. (1991). The Modern Corporation and Private Property. New Brunswick (U.S.A) and Londen (U.K): Transaction Publishers.
Blouin, J. L., Gleason, C. A., Mills, L. F., & Sikes, S. A. (2010). Pre-empting disclosure? Firms’ decisions prior to FIN No 48. The Accounting Review, 85(1), 791-815.
Cavana, R., Delahaye, B. L., & Sekeran, U. (2001). Applied business research: Qualitative and quantitative methods. Australia: John Wiley & Sons.
Cen, L., Maydew, E. L., Zhang, L., & Zuo, L. (2019). Tax Planning Diffusion, Real Effects, and Sharing of Benefits. Kenan Institute of Private Enterprise Research Paper (18-15).
Chen, S., Chen, X., Cheng, Q., & Shevlin, T. (2010). Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95(1), 41-61.
Cheng, J., Elyasiani, E., & Jia, J. J. (2011). Institutional ownership stability and risk taking: Evidence from the life-health insurance industry. Journal of Risk and Insurance, 78(3), 609-641.
Christians, A. (2013). Tax activists and the global movement for development through transparency. In Yariv Brauner & Miranda Stewart (Eds.), Tax Law and Development. Cheltenham, UK: Edward Elgar Publishing, 288-315.
Coram, P. (2011). The effect of voluntary disclosure of non-financial performance: indicators on company valuation judgements: an experimental analysis: openresearch-repository.anu.edu.au.
Denis, D. K., & McConnell, J. J. (2003). International corporate governance. Journal of Financial and Quantitative Analysis, 38(1), 1-36.
Derashid, C., & Zhang, H. (2003). Effective tax rates and the "industrial policy" hypothesis: Evidence from Malaysia. Journal of International Accounting, Auditing and Taxation, 12(1), 45-62.
Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145-179.
Desai, M. A., & Dharmapala, D. (2008). Tax and corporate governance: An economic approach. In W. Schon (Ed.), Tax and Corporate Governance. Berlin Heidelberg: Springer, 13-30.
Desai, M. A., & Dharmapala, D. (2009). Corporate tax avoidance and firm value. The Review of Economics and Statistics, 91(3), 537-546.
Desai, M. A., Dyck, A., & Zingales, L. (2007). Theft and taxes. Journal of Financial Economics, 84(3), 591-623.
Erickson, M., Hanlon, M., & Maydew, E. L. (2004). How much will firms pay for earnings that do not exist? Evidence of taxes paid on allegedly fraudulent earnings. The Accounting Review, 79(2), 387-408.
Evers, M. T., Finke, K., Matenaer, S., Meier, I., & Zinn, B. (2014). Evidence on book-tax differences and disclosure quality based on the notes to the financial statements. ZEW-Centre for European Economic Research Discussion Paper. Retrieved from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2475909
Florackis, C. (2008). Agency costs and corporate governance mechanisms: Evidence for UK firms. International Journal of Managerial Finance, 4(1), 37-59.
Friese, A., Link, S., & Mayer, S. (2008). Taxation and corporate governance–the state of the art. In Tax and Corporate Governance (5th ed.). Berlin Heidelberg: Springer, 357-425.
Graham, J. R., Hanlon, M., Shevlin, T., & Shroff, N. (2014). Incentives for tax planning and avoidance: Evidence from the field. The Accounting Review, 89(3), 991-1023.
Gross, A. (2011). Does mandatory disclosure affect recognition of contingent liabilities? Evidence from FIN 48. Retrieved from: http://dx.doi.org/10.2139/ssrn.1905207
Hafkenscheid, R. (2010). What effective tax rate lacks as a performance indicator? International Tax Review, 21(1), 14-17.
Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2013). Multivariate Data Analysis (7th ed.). New Jersey: Pearson Education, Limited.
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2), 127-178.
Hasegawa, M., Hoopes, J. L., Ishida, R., & Slemrod, J. (2013). The effect of public disclosure on reported taxable income: Evidence from individuals and corporations in Japan. National Tax Journal, 66(3), 571-607.
Ho, S. S. M., & Wong, S. K. (2001). A study of the relationship between corporate governance structures and the extent of voluntary disclosure. Journal of International Accounting, Auditing and Taxation, 10(2), 139-156.
Holland, K. (1998). Accounting policy choice: The relationship between corporate tax burdens and company size. Journal of Business Finance & Accounting, 25(3-4), 265-288.
Hoopes, J. L., Langetieg, P., Maydew, E. L., & Mullaney, M. (2019). Is Tax Planning Best Done In Private? Available at SSRN 3420362.
Hoopes, J. L., Robinson, L., & Slemrod, J. (2023). Corporate Tax Disclosure. Retrieved from: https://www.nber.org/papers/w31467
Iazzi, A., Vacca, A., Maizza, A., & Schiavone, F. (2023). The role of corporate board and auditors in tax planning: evidence from Italy. Management Research Review, 46(3), 321-339.
Inger, K. K., Meckfessel, M. D., Zhou, M., & Fan, W. (2018). An Examination of the Impact of Tax Avoidance on the Readability of Tax Footnotes. The Journal of the American Taxation Association, 40(1), 1-29.
Jensen, M. C. (1986). Agency cost of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323-329.
Jensen, M. C. (2010). The modern industrial revolution, exit, and the failure of internal control systems. Journal of Applied Corporate Finance, 22(1), 43-58.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
John, D. P., Pincus, M., & Rego, S. O. (2003). Earnings management: New evidence based on deferred tax expense. The Accounting Review, 78(2), 491-521.
Jones, S., & Rhoades-Catanach, S. (2005). Advanced Strategies in Taxation (4th ed.). New York: McGraw-Hill.
Kanto, A. J., & Schadewitz, H. J. (1997). A multidimensional model for the disclosure policy of a firm. Scandinavian Journal of Management, 13(3), 229-249.
Karazsia, B. T., & Berlin, K. S. (2018). Can a mediator moderate? Considering the role of time and change in the mediator-moderator distinction. Behavior Therapy, 49(1), 12-20.
Kornhauser, M. E. (2005). Doing the full Monty: Will publicizing tax information increase compliance. Canadian Journal of Law and Jurisprudence, 18(1), 1-23.
Ku Ismail, K. N. I., & Chandler, R. (2005). Disclosure in the quarterly reports of Malaysian companies. Financial Reporting, Regulation and Governance, 4(1), 1-26.
Lenter, D., Shackelford, D., & Slemrod, J. (2003). Public disclosure of corporate tax return information: Accounting, economics and legal perspectives. National Tax Journal, 56(4), 803-830.
Lev, B., & Nissim, D. (2010). Taxable income, future earnings, and equity values. The Accounting Review, 79(4), 1039-1074.
Lipton, R. M. (2003). New tax shelter disclosure and listing Regulations promise headaches for everyone. Journal of Taxation, 98(1), 5-21.
MacKinnon, D. P., Fairchild, A. J., & Fritz, M. S. (2007). Mediation analysis. Annu. Rev. Psychol., 58, 593-614.
Maydew, E., & Shackelford, D. (2007). The changing role of auditors in corporate tax planning. In A. J. In Auerbach, Hines, J. R., & Slemrod, J. (Ed.), Taxing Corporate Income in the 21st Century: Cambridge University Press, 307-337.
MFCCG. (2000). Malaysian Code of Corporate Governance. Kuala Lumpur: Malaysian Institute of Corporate Governance.
Mgammal, M. H. (2015). The effect of tax planning and corporate governance on tax disclosure in Malaysia. Thesis for the degree of Doctor of Philosophy, University Utara Malaysia, Sinto, Kedah. Retrieved 7 July, 2016, from: http://etd.uum.edu.my/5422/2/s93683.
Mgammal, M. H. (2017). Corporate Tax Disclosure (1 ed.). Saarbrücken - Germany: LAP LAMBERT Academic Publishing. Retrieved from: https://www.morebooks.de/store/us/book/corporate-tax-disclosure/isbn/978-620-2-00954-6?currency=EUR.
Mgammal, M. H. (2019). The Effect of Components of Tax Saving on Tax Disclosure: A Panel Data Approach in Malaysian Listed Companies. Pacific Accounting Review, 31(4), 574-601. https://doi.org/10.1108/PAR-10-2018-0080
Mgammal, M. H. (2020). Corporate Tax Planning and Corporate Tax Disclosure. Meditari Accountancy Research, 28(2), 327-364. https://doi.org/10.1108/MEDAR-11-2018-0390
Mgammal, M. H., Bardai, B., & Ku Ismail, K. N. I. (2018). Corporate governance and tax disclosure phenomenon in the Malaysian listed companies. Corporate Governance: The International Journal of Business in Society, 18(5), 779-808. https://doi.org/710.1108/CG-1108-2017-0202.
Mgammal, M. H., & Ku Ismail, K. N. I. (2015a). Corporate Tax Disclosure: A review of Concepts, Theoretical, Constraints, and Benefits. Asian Social Science, 11(28), 1-14.
Mgammal, M. H., & Ku Ismail, K. N. I. (2015b). Corporate Tax Planning Activities: Overview of Concepts, Theories, Restrictions, Motivations and Approaches. Mediterranean Journal of Social Sciences, 6(6 S4), 350-358. http://dx.doi.org/10.5901/mjss.2015.v6n6s4p350
Mills, E. M., & Maydew, E. (1998). Investments in tax planning. Journal of the American Taxation Association, 20(1), 1-20.
Morris, N. W. (1989). The Association Between Selected Corporate Attributes and Management Incentives for Voluntary Accounting Disclosure. Ann Arbor, Michigan: University Microfilms.
Muller, D., Judd, C. M., & Yzerbyt, V. Y. (2005). When moderation is mediated and mediation is moderated. Journal of Personality and Social Psychology, 89(6), 852.
Munter, P., & Kren, L. (1995). The impact of uncertainty and monitoring by the board of directors on incentive system design. Managerial Auditing Journal, 10(4), 23-34.
Olayiwola, J., & Okoro, S. (2021). Tax Planning, Corporate Governance and Financial Performance of Selected Quoted Non-Financial Companies in Nigeria (2007–2018). Organizations and Markets in Emerging Economies, 12(2), 332-352.
Pallant, J. (2010). Spss Survival Manual: A step by step guide to data analysis using SPSS. New Jersey: McGraw-Hill Education.
Preacher, K. J., Rucker, D. D., & Hayes, A. F. (2007). Addressing moderated mediation hypotheses: Theory, methods, and prescriptions. Multivariate Behavioral Research, 42(1), 185-227.
Premuroso, R. (2008). An analysis of voluntary annual report disclosures of outsourcing: Determinants and firm performance. Thesis for the degree of Doctor of Philosophy, Florida Atlantic University, Florida U.S. Retrieved from: http://search.proquest.com/docview/304568419/fulltextPDF/139BBA67CC33A67696D/1?accountid=42599
Rego, & Wilson, R. (2012). Executive compensation, equity risk incentives and corporate tax aggressiveness. Journal of Accounting Research, 50(3), 775–810.
Sabli, N., & Noor, R. M. (2012). Tax planning and corporate governance. The International Conference on Business and Economic, 12-13. March Golden Flower Hotel, Bandung, Indonesia.
Schadewitz, H. J., & Blevins, D. R. (1998). Major determinants of interim disclosures in an emerging market. American Business Review, 16(1), 41-55.
Schmidt, A. P. (2006). The persistence, forecasting and valuation implications of the tax change component of earnings. The Accounting Review, 81(3), 589-616.
Scholes, M. S., Wilson, G. P., & Wolfson, M. A. (1992). Firms' responses to anticipated reductions in tax rates: The Tax Reform Act of 1986. Journal of Accounting Research, 30(5), 161-185.
Scholes, M. S., Wolfson, M. A., Erickson, M., Maydew, E. L., & Shevlin, T. (2009). Taxes and Business Strategy: A Planning Approach (4th ed.). New Jersey: Pearson Prentice Hall.
Schwab, C. M., Stomberg, B., & Williams, B. M. (2022). Effective tax planning. The Accounting Review, 97(1), 413-437.
Slemrod, J. (2005). What corporations say they do and what they really do: Implications for tax policy and tax research. Journal of the American Taxation Association, 27(1), 91-99.
Spence, M. (1973). Job market signaling. The Quarterly Journal of Economics, 87(3), 355-374.
Statistics Department. (2013). Malaysia's economy growth. Retrieved from: https://www.thestar.com.my/business/business-news/2013/02/20/malaysias-economy-grew-64-in-q4-2012-fastest-in-9-quarters-update
SustainAbility. (2006). Press release: Taxing issues: Responsible business and tax. Retrieved from: http://www.sustainability.com/news/press-release-taxing-issues-responsible-business-and-tax#.Uq-aD9IW3fs
Tackie, G., Agyei, S. K., Bawuah, I., Adela, V., & Bossman, A. (2022). Tax planning and financial performance of insurance companies in Ghana: the moderating role of corporate governance. Cogent Business & Management, 9(1), 2144097.
Tiley, J. (2005). Revenue Law (5th ed.). Oxford: Hart Publishing.
Vello, A., & Martinez, A. (2012). Efficient tax planning: An analysis of its relationship with market risk. Available at SSRN. Retrieved from: http://dx.doi.org/10.2139/ssrn.2140000
White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica: Journal of the Econometric Society, 48(4), 817-838.
Wilson, R. J. (2009). An examination of corporate tax shelter participants. The Accounting Review, 84(3), 969-999.
Wire, B. (2006). Estate planning saves you time and helps you gain a tax-planning advantage when you deal with wills, gifts in trust, insurance trusts and more.
Xiao, C., Ender, P. B., Mitchell, M., & Wells, C. (2005). Stata web books: Regression with Stata. Retrieved from: http://www.ats.ucla.edu/stat/stata/webbooks/reg/default.htm/
Xu, W., Wang, K., & Anandarajan, A. (2012). Quality of reported earnings by Chinese firms: The influence of ownership structure. Advances in Accounting, 28(1), 193-199.
Downloads
Published
Issue
Section
License
Copyright (c) 2023 Mahfoudh Hussein Mgammal, Mujeeb Saif Mohsen Al-Absy
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
The RCO adopts the Free Open Access policy, under the standard Creative Commons agreement (CC BY-NC-ND 4.0). The agreement provides that:
- Submission of text authorizes its publication and implies commitment that the same material is not being submitted to another journal. The original is considered definitive.
- Authors retain the copyright and grant the journal the right of first publication, with the work simultaneously licensed under the Creative Commons Attribution License which allows the sharing of the work with acknowledgment of authorship and initial publication in this journal.
- Authors are authorized to take additional contracts separately, for non-exclusive distribution of the version of the work published in this journal (e.g. publish in an institutional repository or as a book chapter), with necessary recognition of authorship and initial publication in this journal.
- Authors are allowed and encouraged to publish and distribute their work online (e.g. in institutional repositories or on their personal page) before or during the editorial process, as this can generate productive changes as well as increase the impact and citation of published work (See The Effect of Free Access).
- The journal does not pay copyright to the authors of the published texts.
- The journal's copyright holder, except those already agreed in the Free Open Access Agreement (CC BY-NC-ND 4.0), is the Accounting Department of the Faculty of Economics, Administration and Accounting of Ribeirão Preto of the University of São Paulo.
No submission or publication fees are charged.
Up to 4 authors per article are accepted. Exceptionally duly justified cases may be reviewed by the Executive Committee of the RCO. Exceptional cases are considered as: multi-institutional projects; manuscripts resulting from the collaboration of research groups; or involving large teams for evidence collection, construction of primary data, and comparative experiments.
It is recommended that the authorship be ordered by contribution of each of the individuals listed as authors, especially in the design and planning of the research project, in obtaining or analyzing and interpreting data, and writing. Authors must declare the actual contributions of each author, filling the letter to the editor, at the beginning of the submission, taking responsibility for the information given.
Authors are allowed to change throughout the evaluation process and prior to the publication of the manuscript. The Authors should indicate the composition and final order of authorship in the document signed by all those involved when accepted for publication. If the composition and authoring order is different than previously reported in the system, all previously listed authors should be in agreement.
In the case of identification of authorship without merit or contribution (ghost, guest or gift authorship), the RCO follows the procedure recommended by COPE.