Nexus of Tax Avoidance and Firm Value in Pakistan: Moderating Role of Board Independence

Abstract

The aim of the current study is to investigate the impact of tax avoidance on firm value, further; this study also tests the moderating role of board independence in context of the association between tax avoidance and firm value. Literature provides inconclusive evidence in this regard and posits high dependence on contextual settings. This study extends literature by providing evidence from Pakistan and also reveals that tax avoidance and firm value relationship is highly dependent on board independence (CG). The agency theory suggests a negative association between tax avoidance and firm value, but a strong corporate governance mechanism mitigates this negative impact. Pakistan provides ideal context to study the nexus between tax avoidance and firm value, since the country has been facing large budget deficit and a low tax collection level. Therefore, it is important to investigate this relationship. This study is conducted using a sample of non-financial firms listed at Pakistan stock exchange (PSX) from 2005 to 2019.The System-GMM approach is used to test the hypothesis since System-GMM has the tendency to tackle the endogeneity problem that surfaces due to dynamic panel and reverses causality. The findings suggest that tax avoidance negatively impacts the market valuation of the firms. We further find that board independence moderates the relationship by mitigating the negative impact of tax avoidance. These findings are consistent with the agency theory. This study contributes to literature by providing evidence from Pakistan. It is the first study in Pakistan that utilizes three different proxies of tax avoidance to check its impact on firm value while using board independence as a moderating variable.