Tax risk and firm risk: does firm size matter?

Purpose The purpose of this paper is to investigate the effect of tax risk on firm risk. It also examines the moderating effect of firm size on the link between tax risk and firm risk. Design/methodology/approach This study analyzed the relationship between tax risk and firm risk among CAC 40 firms using three models: a general model and two additional models focusing on relatively large and relatively small firms. Robustness tests were conducted to confirm the validity of the findings. Findings This paper demonstrates that firm size moderates the relationship between tax risk and firm risk: tax risk has a negative impact on firm risk in relatively larger firms but a positive effect in relatively smaller firms, highlighting a distinct perverse effect of tax risk on corporate risk of smaller firms in particular. Practical implications This study emphasizes the importance for managers, particularly in relatively small firms, to implement tax risk management strategies to minimize potential negative impacts on firm risk. Investors are also encouraged to view firm size and tax risk as interconnected factors, promoting informed decision-making with a focus on sustainability and responsible financial practices. Social implications This paper contributes to broader tax and sustainability finance research by emphasizing the need for regular budgetary policy reviews aimed at fostering a balanced tax system. It also encourages companies to embed ethical standards and enterprise risk management in their tax practices, reinforcing the embeddedness of business in society and enhancing the legitimacy of business operations in the eyes of stakeholders. Originality/value The findings of this paper provide valuable insights into the relationship between tax risk and firm risk, introducing the impact of firm size as a significant factor. This evidence not only advances tax research but also offers guidance to financial statement users on the importance of considering business legitimacy and sustainability when evaluating tax-related risks.