Correlation of Simultaneous Maintenance of Debt and Equity and Corporate Tax Avoidance

Subject Areas : • Emerging technology in the field of Accounting and its future

Ahmad Fatahi ¹ , Hasan Fatahi Nafchi ² , Abdolreza Salehpour ³

1 - Master of Accounting, Faculty of Management and Economics, Tarbiat Modares University, Tehran, Iran
2 - Assistant Professor, Department of Accounting, Faculty of Administrative Sciences and Economics, Isfahan University, Isfahan, Iran
3 - Master's degree, Marine Research and Industrial Department

Received: 2024-06-10 Accepted : 2024-08-18 Published : 2024-08-18

Keywords: Tax avoidance, Financing, Simultaneity of debt maintenance and equity.,

Abstract :

Objectives: The main goal of this research is to explore the relationship between simultaneously maintaining debt and equity and corporate tax avoidance. The study focuses solely on this objective.

Design/methodology/approach: Tax avoidance plays a crucial role in reducing a firm's payments to the government. Shareholders are incentivized to engage in tax avoidance practices, while financiers face the negative consequences of increased risks. However, when both debt and equity holders are present, financiers are less concerned about risk shifting as the risk is transferred between sectors. This can lead to a reduction in tax avoidance. Due to the lack of empirical studies in this area, this study examines the relationship between maintaining debt and equity simultaneously and corporate tax avoidance. A sample of 102 firms listed on the Tehran Stock Exchange from 2013 to 2014 was collected and analyzed using multiple regression.

Results: The test of research hypotheses revealed a significant negative relationship between maintaining debt and equity simultaneously and a firm's tax avoidance. This relationship was found to be significant across all three measures of tax avoidance (effective cash tax rate, the difference between accounting profit and taxable profit, and the final effective tax rate).

Innovation: This research is innovative as it explores the impact of maintaining debt and equity simultaneously on tax avoidance in Iran, a topic that has not been previously studied. Conducting such a study will help fill the existing research gap.

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