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Tax avoidance as earning game player in emerging economies: evidence from Pakistan

Jahanzeb Marwat (Business Administration, Sukkur Institute of Business Administration, Sukkur, Pakistan)
Suresh Kumar Oad Rajput (Business Administration, Sukkur Institute of Business Administration, Sukkur, Pakistan)
Sarfraz Ahmed Dakhan (Business Administration, Sukkur Institute of Business Administration, Sukkur, Pakistan)
Sonia Kumari (Business Administration, Sukkur Institute of Business Administration, Sukkur, Pakistan)
Muhammad Ilyas (Business Administration, Sukkur Institute of Business Administration, Sukkur, Pakistan)

South Asian Journal of Business Studies

ISSN: 2398-628X

Article publication date: 29 June 2021

249

Abstract

Purpose

The current study aims to achieve two targets. First, examine empirically that whether corporate managers use tax avoidance to influence short-term profitability? Second, investigate the impact of tax avoidance on the value of firms. The tax accounts provide the opportunity to influence temporary/permanent profitability but empirical studies overlooking this matter, particularly in emerging economies.

Design/methodology/approach

First, the authors identified unexpected fluctuations of tax avoidance and then examine whether it impacts the profitability signal and firms' value? The unbalanced panel data of 189 non-financial firms for the period 2000–2018 are used for empirical analysis. The estimation biases and results consistency are verified by using two different econometric models including generalized least square and two-stage least square

Findings

The study identifies that managers manipulate the profitability signal through tax avoidance. Tax avoidance practices help in earning management and earning smoothing to avoid negative signals in the stock market. In line with the behavioral finance view, tax avoidance has a positive impact on current stock returns because investors focus on profitability without a detailed screening of cash flows.

Originality/value

A limited number of studies investigate the use of tax avoidance for manipulation of the short-term earning signal. Identifying gaps and limitations in the literature, this study provides invaluable insights into tax avoidance and its association with the profitability and value of firms. The findings are important for investors, managers and policymakers in making portfolio decisions and corporate policies.

Keywords

Citation

Marwat, J., Rajput, S.K.O., Dakhan, S.A., Kumari, S. and Ilyas, M. (2021), "Tax avoidance as earning game player in emerging economies: evidence from Pakistan", South Asian Journal of Business Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/SAJBS-10-2020-0379

Publisher

:

Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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