Mitigating Tax Avoidance through Corporate Governance: The Mediating Role of Financial Distress

The post-pandemic era has brought Pakistan into a spiral of economic instability and downturn, making taxation a vital avenue for the economic survival of country. One of the key avenues of revenue collection for an economy is its manufacturing sector. Therefore, the current study analyzed the facilitating role of financial distress to examine the relationship amongst governance mechanisms and tax avoidance. The sample comprised data collected from 167 firms for 13 years, from the time period of 2011-2023. Panel data Generalized Method of Moment (GMM) regression model is utilized for analysis. Findings indicate that the firms in Pakistan tend to get involved in tax avoidance during economic distress and effective corporate governance may significantly reduce this behavior. The mediation analysis established that the association of board structure and tax avoidance is channeled through financial distress. This association highlighted those weak corporate mechanisms in a firm leading to financial distress which, in turn, leads to tax avoidance behavior. Hence, addressing corporate governance issues in the firm may also indirectly influence the tax avoidance behavior in the corporate sector of Pakistan. Furthermore, the control variables including firm size (FS), market-to-book ratio, return on assets (ROA), and leverage (LEV) have non-significant influence on tax avoidance. The study provided some unique implications related to tax avoidance, particularly with context to a struggling economy, such as Pakistan. These findings may also help tax officials to be more cautious of the firms that have weak indicators of corporate governance. Furthermore, in weak economic scenarios, such as Pakistan, tax avoidance practices tend to increase across the business sectors. Lastly, this association between tax management and financial distress would enable the investors' needs to assess premium cash flow and the risk of capital costs.

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Publication Details

Journal
Audit and Accounting Review
Published
2024-12-31
DOI
https://doi.org/10.32350/aar.42.05
Citations
1
Primary Topic
Corporate Taxation and Avoidance
Type
article
Field-Weighted Citation Impact
0.95
Controls
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article

Mitigating Tax Avoidance through Corporate Governance: The Mediating Role of Financial Distress

Salma Sadiq, Muhammad Haroon Rasheed
1 citations
Audit and Accounting Review
Corporate Taxation and Avoidance
0.95
article

Mitigating Tax Avoidance through Corporate Governance: The Mediating Role of Financial Distress

Salma Sadiq, Muhammad Haroon Rasheed
article en
1 citations

Abstract

The post-pandemic era has brought Pakistan into a spiral of economic instability and downturn, making taxation a vital avenue for the economic survival of country. One of the key avenues of revenue collection for an economy is its manufacturing sector. Therefore, the current study analyzed the facilitating role of financial distress to examine the relationship amongst governance mechanisms and tax avoidance. The sample comprised data collected from 167 firms for 13 years, from the time period of 2011-2023. Panel data Generalized Method of Moment (GMM) regression model is utilized for analysis. Findings indicate that the firms in Pakistan tend to get involved in tax avoidance during economic distress and effective corporate governance may significantly reduce this behavior. The mediation analysis established that the association of board structure and tax avoidance is channeled through financial distress. This association highlighted those weak corporate mechanisms in a firm leading to financial distress which, in turn, leads to tax avoidance behavior. Hence, addressing corporate governance issues in the firm may also indirectly influence the tax avoidance behavior in the corporate sector of Pakistan. Furthermore, the control variables including firm size (FS), market-to-book ratio, return on assets (ROA), and leverage (LEV) have non-significant influence on tax avoidance. The study provided some unique implications related to tax avoidance, particularly with context to a struggling economy, such as Pakistan. These findings may also help tax officials to be more cautious of the firms that have weak indicators of corporate governance. Furthermore, in weak economic scenarios, such as Pakistan, tax avoidance practices tend to increase across the business sectors. Lastly, this association between tax management and financial distress would enable the investors' needs to assess premium cash flow and the risk of capital costs.

Audit and Accounting ReviewVol. 4(2)
COMSATS University Islamabad (PK), University of Sargodha (PK), University of Wah (PK), Riphah International University (PK)
Openalex Percentile: Top 16%
Corporate Taxation and Avoidance
0.95
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