An Examination of the Impact of Tax Avoidance on Investment Efficiency: The Mediating Role of Cash Holdings

Subject Areas : Role of accounting in capital market efficiency and Informativeness

Omid Farhad Touski ^{1 *} , Armaghan Seyfideli ²

1 - Assistant Professor Department of Accounting, Khorramabad Branch, Islamic Azad University, Khorramabad, Iran
2 - Master of Accounting, Khorramabad Branch, Islamic Azad University, Khorramabad, Iran

Received: 2025-04-08 Accepted : 2025-06-17 Published : 2025-06-21

Keywords: Investment, Efficiency, Tax Avoidance, Cash,

Abstract :

 By reducing their tax liabilities, companies can free up financial resources that may be redirected toward productive investments, potentially enhancing overall investment efficiency. In this context, effective liquidity management plays a key role in shaping corporate investment decisions, as it influences the firm's ability to fund projects, mitigate financial constraints, and respond to unforeseen economic fluctuations. Building on this premise, the present study investigates the impact of tax avoidance on investment efficiency, with particular emphasis on the mediating role of cash holdings. The research focuses on 113 companies listed on the Tehran Stock Exchange over a ten-year period from 2014 to 2023. Using multivariate linear regression analysis, the findings reveal a statistically significant negative relationship between tax avoidance and cash holdings, indicating that firms engaging in tax avoidance tend to retain less cash. Conversely, tax avoidance has a positive and significant impact on investment efficiency. Furthermore, cash holdings themselves exhibit a significant inverse relationship with investment efficiency, suggesting that excessive cash reserves may reduce the effective allocation of capital. The mediating role of cash holdings in the relationship between tax avoidance and investment efficiency is further confirmed through the application of the Sobel test. These findings provide valuable insights into the complex interplay between tax strategy, liquidity management, and investment performance. In light of the current economic instability, where firms are under pressure to optimize resource allocation while minimizing financial risk, the results of this study offer practical guidance for both corporate decision-makers and investors aiming to enhance .

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