Tax Avoidance, Managerial Ability and Stock Price Crash Risk

Pakistan is facing a dilemma of lower tax revenue to GDP ratio, leading to higher fiscal deficits. Tax is a financial fare imposed on the taxpayers by the state or governing body to fund annual expenses. Tax avoidance (TA) potentially increases the cash flows of the firm. The Stock Price Crash Risk (SPCR) is an essential factor for investors and economic agents in making financial and investment decisions. Several studies employed the agency theory framework for determining the probability of a stock price crash. . The study aims to investigate the impact of TA activities on SPCR in Pakistan. This study used panel data covering period from 2009 to 2020 of 60 non-financial firms from KSE-100 index listed on the Pakistan Stock Exchange (PSX). The financial statements data was collected from SECP, PSX and State Bank of Pakistan. Managerial Ability (MA) was employed as moderator for the relationship between TA and SPCR. The results show that increase in TA activities by the firm increases the SPCR. It is also found that the MA plays a moderating role as able managers can reduce the impact of TA on SPCR. The capable tax management team in the company may reduce TA. Practical implications and contributions of the research include improving the literature, providing new insight for investors and portfolio managers in investment decision making. It would be helpful for the Government, policymakers, and regulators for developing and implementing an effective framework to reduce the tendency of TA.