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The Effect of Tax Avoidance On Firm Value With Tax Risk As Moderating Variable
The Effect of Tax Avoidance On Firm Value With Tax Risk As Moderating Variable
The Effect of Tax Avoidance On Firm Value With Tax Risk As Moderating Variable
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The Effect of Tax Avoidance on Firm Value with Tax Risk as Moderating
Variable
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Turwanto2
Directorate General of Taxes, turwanto@gmail.com
has potential to get sanction or penalty from the described that stock market prices reflect
tax authority (Hanlon and Slemrod, 2009). information. Investors will respond to new
Managers will consider tax avoidance activities at information available to buy or sell their stock.
an acceptable risk level. The stock price will move quickly when the
company's financial statements are published. The
Taxes have important role in corporate
movement will increase if the company
financing decision (Titman, Keown, and Martin,
performance exceeds investor expectations, and
2014) that have consequences on firm value
conversely the stock price will decrease if the
(Fama and French, 1998). Tax avoidance can be
company performance is less than market
seen as a management strategy in carrying out
expectations (Titman, Keown, and Martin, 2014).
effective tax planning and generating more profits
or cash flows in the future (Desai and
Dharmapala, 2009; Inger, 2014). Another view Tax Avoidance
states that tax avoidance is risky action and can Tax avoidance can be interpreted as the
use of tax law loopholes carried out by companies
cause companies to bear greater burden in the
to obtain profits by significantly reducing
future through sanction, penalty, and other
corporate tax payments (Braithwaite, 2005). Tax
payments, as well as reputation costs (Hanlon and
reduces net income and after-tax net cash flow
Slemrod, 2009; Armstrong et al., 2015).
available to investors, so it tends to provide
Tax risk is also an important consideration greater motivation for companies to conduct tax
for investors in making investments. The risk of avoidance practices (Kovermann, 2018). Dyreng,
uncertainty in future tax payments influences Hanlon, and Maydew (2010) defined tax
investors' valuation of corporate tax avoidance avoidance as "anything that reduces the firm’s
practices (Drake, Lusch, and Stekelberg, 2019). taxes relative to its pretax accounting income" (p.
Drake, Lusch, and Stekelberg (2019) stated that 1164). Hanlon and Heitzman (2010) described tax
their research was the first study to examine the planning strategies as a continuum. If tax
effect of tax avoidance and tax risk on firm value. compliance is at one end, then tax noncompliance
So far, there have not been many studies in is in a position closer to the other end of the
Indonesia that discuss the effect of tax risk on firm continuum.
value and the effect of tax risk on the relationship
Frank, Lynch, and Rego (2009) stated that
between tax avoidance and firm value. Based on
tax avoidance activities carried out by the
the phenomena, facts, and concepts described
company can be described through tax avoidance,
earlier, research related to tax risk and firm value
tax planning, and aggressive tax reporting. Tax
is an interesting topic and provides new
avoidance is an activity to reduce the amount of
contributions to accounting and taxation research
tax that can be done by choosing tax-free
in Indonesia.
investment up to conducting aggressive tax
planning (Dyreng, Hanlon, and Maydew, 2008).
LITERATURE REVIEW AND HYPOTHESIS Tax avoidance is seen as a strategy that benefits
DEVELOPMENT companies and shareholders because it provides
Firm value resources needed to develop company through
The company's main goal is to maximize investment or increase cash available to
shareholder value (Brealey, Myers, and Allen, shareholders through dividend distribution (Drake,
2011). Shareholder value is reflected in the Lusch, and Stekelberg, 2019). Conversely, tax
company's stock price which forms the firm value. avoidance can be viewed negatively by investors
The company's stock price is the simplest and best and market because it can cause additional costs
measure for shareholder prosperity (Gitman and for the company (Hanlon and Slemrod, 2009;
Zutter, 2012). The higher the stock price, the Kovermann, 2018).
greater the level of shareholders’
prosperity.Titman, Keown, and Martin (2014)
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2014).According to Jacob and Schütt (2013), tax payments relates to the volatility of future stock
planning score has positive impact on the returns. This finding shows that the company risk
relationship between pre-tax income and market- increases in line with the increase in tax risk.
to-book ratio. Chasbiandani and Martani (2012) Dhaliwal et al. (2017) concluded that the volatility
and Kurniawan and Syafruddin (2017) also found of taxable income is positively related to firm risk.
positive effect of tax avoidance on firm value. The Basically, investors prefer investments that
tax law enforcement that are less effective in provide high returns with minimal risk (Ehrhardt
Indonesia is considered to be one of the factors and Brigham, 2011). Drake, Lusch, and
that causes tax avoidance benefits the company Stekelberg (2019) concluded that tax risk was
(Chasbiandani and Martani, 2012). valued negatively by investors which meant
lowering the value of the company. Tax risk
Conversely, some studies concluded the
provides uncertainty about future cash inflows and
negative relationship between tax avoidance and
outflows. Therefore, the second hypothesis in this
firm value. Kim, Li, and Zhang (2011) found
study is formulated as follows:
positive relationship between tax avoidance
andstock price crash, based on idea that tax H2: Tax risk has negative effect on firm value.
avoidance create sunclear environment and can
bring bad news to the company. Rego and Wilson Drake, Lusch, and Stekelberg (2019)
(2012) argued that aggressive tax planning explained that their research was the first study to
detected by the tax authority can impose large have broad impact on the topic of discussing the
costs on firms such as consultant fees, legal fees, effect of tax risk on firm value. Their result show
and other firm resource expenditures. Tax that tax risk affects the relationship between tax
avoidance activities can have detrimental effect on avoidance and firm value. Investors distinguish
companies and investors such as decreasing less volatile tax avoidance with more volatile tax
company stock prices and other indirect costs avoidance (Drake, Lusch, and Stekelberg, 2019).
(Hanlon and Slemrod, 2009). Less volatile tax avoidance has lower risk so that
Although there are different results related it provides more accurate information regarding
to the relationship between tax avoidance and firm corporate tax avoidance in the future. Whereas
value, tax avoidance can be seen as management more volatile tax avoidance means more risk,
strategy that can increase firm value. Tax making it more difficult for investors to predict
avoidance can provide greater resources for the level of corporate tax avoidance in the future.
companies to invest or provide distribution to In line with the result of the study, the third
shareholders. In countries with level of hypothesis is formulated as follows:
supervision and enforcement of tax laws that are H3: Tax risk moderates the positive
not yet strict, the benefits obtained from tax relationship between tax avoidance and firm
avoidance outweigh the risks that must be borne value.
by company. Thus, the first hypothesis in this
study is formulated as follows: METHODOLOGY
Research Method
H1: Tax avoidance has positive effect on firm
The research model used in this study
value.
replicates the study conducted by Drake, Lusch,
and Stekelberg (2019) with some adjustments.
Inrecent research, there is not much
Some control variables according to Drake, Lusch,
discussion about the effect of tax risk on firm
and Stekelberg (2019) are not used in this study.
value. Drake, Lusch, and Stekelberg (2019)
Net operating loss carry forwards (NOL) variable
claimed that their research is the first study to
are not used in this research because there are
examine the effect of tax risk on firm value.
different regulations related to compensation for
Guenther, Matsunaga, and Williams (2017) stated
fiscal losses in the United States and Indonesia.
that the standard deviation of annual cash tax
Research and development cost
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(R&D) variable are not used in this study because The operational definitions of the research
most of the firms in Indonesia do not reveal the variables are presented in Table 1.
costs of research and development as a separate Table 1. Operational Definition and Variable
component in the financial statements. Measurement
This study replicates the three models as No Variable Definition and Measurement
research by Drake, Lusch, and Stekelberg (2019). Firm value FIRMVAL is measured using the
Drake, Lusch, and Stekelberg (2019) explained natural logarithm of market value of
that the purpose of statistical testing using three equity (Drake, Lusch, and
models is to test tax avoidance and tax risk as two Stekelberg, 2019). Market value of
equity is measured using the stock
different things. However, they concluded that the price three months after the end of
effect of tax avoidance and tax risk must be tested the reporting year multiplied by the
together. The first research model examines the number of outstanding shares.
effect of tax avoidance on firm value. The first Tax avoidance TAXAVOID uses long-run cash
model is formulated as follows: ETR (CETR5) proxy. CETR5 is
calculated based on the amount of
FIRMVALit = α0it + β1TAXAVOIDit+ β2ROAit +
cash tax payments reported in the
β3VOLROAit + β4ROA*VOLROAit +
β5LN_SALES + β LEV + company's cash flow statement for
it 6 it five years (t-4 to t) divided by
β7FOREIGNit + β8CAPEXit + income before tax in the same
β9GROWTHit+ β10ADVERTit+ period (Dyreng, Hanlon, and
β11INTANGit+ β12DEPRECit+ εit Maydew., 2008; Shevlin, Urcan,
and Vasvari, 2013; McGuire et al.,
The second research model examines the effect of 2016).ETR is inversely related to
tax avoidance. The greater the ETR
tax risk on firm value. The second model is level, the smaller the level of tax
formulated as follows: avoidance. To facilitate the
FIRMVALit = α0it + β1TAXRISKit+ β2ROAit + interpretation of the result of the
study, the CETR5 is multiplied by
β3VOLROAit + β4ROA*VOLROAit
negative one (-1) to form
+ β5LN_SALESit + β6LEVit + TAXAVOID proxy.
β7FOREIGNit + β8CAPEXit +
β9GROWTHit+ β10ADVERTit+ Tax risk TAXRISK
β11INTANGit+ β12DEPRECit+ εit Measurement uses standard
deviation of five-year cash
ETR(Hutchens and Rego, 2015;
Guenther, Matsunaga, and
The third research model examines the effect of Williams, 2017; Drake, Lusch, and
tax risk on the relationship between tax avoidance Stekelberg, 2019), namely period t-
and firm value. The third model is formulated as 4 through t. The greater the
follows: standard deviation, the greater the
corporate tax risk. Measurement of
FIRMVALit = α0it + β1TAXAVOID it+ β2TAXRISKit + tax risk using standard deviation of
β3TAXAVOIDit * TAXRISK it + long-run cash ETR can
β4ROAit + β5VOLROAit + accommodate ETR changes caused
β6ROA*VOLROAit + by tax strategies that are temporary,
non-repetitive, and eliminate bias
β7LN_SALESit + β8LEVit +
between years (Drake, Lusch, and
β9FOREIGNit + β10CAPEXit + Stekelberg, 2019).
β11GROWTHit+ β12ADVERTit+
β13INTANGit+ β14DEPRECit+ εit Return on The level of profitability as
assets (ROA) measured by ROA has positive
effect on firm value. ROA is
measured by dividing pre-tax
Operational Definition and Variable income against total assets
Measurement (Chasbiandani and Martani, 2012;
Chen et al., 2014; Kurniawan and
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N 6 45 77 83 00 072
CAPEX 49 0.059 0.046 0.335 0.000 0.04 g
6 56 09 55 00 978 n
GROWT 49 0.083 0.064 3.774 (0.78 0.24 0.4 0.0 0.7 0.0
H 6 64 43 50 637) 619 VOID 71 00 66 00
ADVERT 49 0.021 0.003 0.511 0.000 0.05
6 40 29 06 00 090 0.0 0.0 0.0
INTANG 49 0.028 0.000 0.945 0.000 0.09 SK 34 25 0.0 03
6 78 76 65 00 969 40
DEPREC 49 0.034 0.031 0.169 0.000 0.02 TAXA 0.0
6 32 06 20 17 162 VOID* 0.1 00
41
SK
The Effect of Tax Risk on Firm Value ROA 2.0 0.0 2.3 0.0 1.8 0.0
The statistical test result in model 2 shows 05 00 88 00 44 00
that TAXRISK has significant positive effect on
FIRMVAL. The result of this study is different 0.0 0.0 0.0
from research conducted by Drake, Lusch, and OA 1.0 00 0.8 15 1.2 00
95 03 16
Stekelberg (2019). The differences in data, state ROA* 4.3 0.0 3.3 0.1 5.0 0.0
conditions, and longer period of previous research 53 20 48 03 38 10
are indicated to be the cause of differences in the OA
relationship direction of TAXRISK on LN_S 0.3 0.0 0.3 0.0 0.3 0.0
FIRMVAL. 70 00 74 00 84 00
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This study has several limitations. This [2] Braithwaite, J. (2005). A good century for tax?
research does not involve companies in the Globalisation, redistribution and tax
financial sector and property, real estate, and avoidance. Public Policy Research, 12(2), 85-
construction sectors that have different tax 92.
[3] Brealey, R., Myers, M., & Allen, F. (2011).
characteristics and policies than other sectors.
Principles of corporate finance (10th ed.). New
Future research is expected to measure the right York, NY: McGraw-Hill/Irwin.
proxies related to tax avoidance in both sectors so [4] Chasbiandani, T.,& Martani, D.(2012).
that samples and research results become more Pengaruh tax avoidance jangka panjang
comprehensive. This study only covers period of 4 terhadap nilai perusahaan. Simposium
years (2014-2017), so further research is expected Nasional Akuntansi XV.
to use longer period. Thus, tax avoidance [5] Chen, X.,Hu, N.,Wang, X.,&Tang, X. (2014).
measurements use 10-year long-run cash ETR can Tax avoidance and firm value: Evidence from
be done. Measurement of tax risk proxies is still China. Nankai Business Review International
limited toSTDCETR5 and STDGETR5 and can be 5(1), 25-42.
developed more in future studies. The [6] Cook, K. A., Moser, W. J.,&Omer, T. C.
(2017). Tax avoidance and ex ante cost of
measurement of tax risk that can be used includes
capital. Journal of Business Finance &
tax risk index as developed by Neuman, Omer, Accounting. Accepted
and Schmidt (2013).Furthermore, further research article.doi:10.1111/jbfa.12258.
is needed to prove the effect of the tax amnesty [7] Desai, M. A., & Dharmapala, D.(2009).
program on the relationship between tax risk and Corporate tax avoidance and firm value. The
firm value. Review of Economics and Statistics, 91(3),
537–546.
[8] Destrianita, P. A., & Malik, A. (2017, January
ROBUSTNESS TEST 3). Tax amnesty jadi sentimen penggerak
IHSG di 2017. Retrieved from
This study conducted robustness test using https://bisnis.tempo.co/read/832208/tax-
long-run GAAP ETR (GETR5) proxy to measure amnesty-jadi-sentimen-penggerak-ihsg-di-
TAXAVOID and 5-year GAAP ETR standard 2017
deviation (STDGETR5) to measure TAXRISK as [9] Dhaliwal, D.S., Lee, H.S.G., Pincus, M., &
used by Drake, Lusch, and Stekelberg (2019) in Steele, L.B. (2017). Taxable income and firm
additional analysis. Regression analysis show risk. The Journal of the American Taxation
consistent results compared to previous test as Association,39(1), 1-24.
shown in Appendix B. Using GETR5, tax [10] Drake, K. D., Lusch, S. J.,& Stekelberg, J.
avoidance has a positive effect on firm value. (2019). Does tax risk affect investor valuation
Then, the measurement of tax risk using of tax avoidance? Journal of Accounting,
Auditing & Finance,34(1), 151–176.
STDGETR5 also shows a positive effect on firm
[11] Dyreng, S. D., Hanlon, M.,&Maydew, E. L.
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STDGETR5 as moderating variable indicates that Accounting Review, 83(1), 61–82.
tax risk moderate positive relationship between [12] Dyreng, S. D., Hanlon, M.,& Maydew, E. L.
tax avoidance and firm value. (2010). The effects of executives on corporate
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REFERENCES [13] Ehrhardt, M. C.,& Brigham, E. F. (2011).
[1] Armstrong, C. S., Blouin, J. L., Jagolinzer, A.
Financial management: Theory and practice
D., & Larcker, D. F. (2015). Corporate
(13th ed.). Mason, OH: South-Western
governance, incentives, and tax avoidance.
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[14] Fama, E. F.,& French, K. R. (1998). Taxes,
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APPENDIX
AppendixA. Correlations Test
Variabel 1 2 3 4 5 6 7 8 9 10 11 12 13
1. FIRMVAL 1.00
2. TAXAVOID 0.11 1.00
3. TAXRISK -0.06 -0.31 1.00
4. ROA 0.49 0.16 -0.13 1.00
5. VOLROA 0.09 0.16 0.03 0.29 1.00
6. LN_SALES 0.80 -0.10 -0.07 0.28 -0.06 1.00
7. LEV -0.04 -0.12 -0.03 -0.12 -0.20 0.25 1.00
8. FOREIGN -0.06 -0.07 0.04 -0.06 0.06 0.03 0.01 1.00
9. CAPEX 0.20 0.15 0.02 0.11 0.11 0.10 0.12 -0.10 1.00
10. GROWTH 0.10 0.14 -0.01 0.02 -0.10 -0.06 0.02 -0.06 0.05 1.00
11. ADVERT 0.06 0.10 -0.07 0.14 0.02 -0.11 -0.12 -0.11 0.08 -0.01 1.00
12. INTANG 0.21 -0.02 -0.03 -0.01 -0.05 0.13 0.09 -0.07 0.13 0.11 -0.07 1.00
13. DEPREC 0.13 0.09 -0.03 0.17 0.13 0.15 0.05 0.00 0.26 -0.09 0.06 -0.13 1.00
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