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THE ROLE OF CORPORATE DIVERSIFICATION IN TAX AVOIDANCE IN COMPANIES LISTED IN THE TEHRAN STOCK EXCHANGE
Corresponding Author(s) : Abdolhossein Talebi Najafabadi
Humanities & Social Sciences Reviews,
Vol. 7 No. 1 (2019): January
Abstract
Purpose of the Study: Tax avoidance means the use of gaps in tax laws for non-payment or late payment of taxes for companies, which is affected by different factors. The present study investigates the impact of diversification on tax avoidance in companies. To this end, the financial information of 384 firms during the period of 2011- 2016 in the Tehran Stock Exchange was examined.
Methodology: In this research, the required financial information was summarized, classified, and calculated in Excel software and the data were analyzed by using E-views software. The dependent variables were effective tax rate and book-tax difference, while the independent variable was corporate diversification, which shows how to divide the market between business sectors (units) in a company. Control variables include size, financial leverage, company’s loss-making, ROA, capital expenditures, R&D, market to book value, CEO ownership, and management of ownership.
Conclusions/Results: The findings obtained from this study demonstrate that at a 95% confidence level, there is no significant relationship between diversification and effective tax rates in companies listed in the Tehran Stock Exchange. However, at a 90% confidence level, diversification reduces the effective tax rate. Furthermore, no reliable evidence was found regarding the effect of diversification on book-tax difference at a 95% confidence level.
Novelty: Tax is a charge imposed by the government on all organizational profits. Various enterprises have complex operations due to their institutional structure, which makes it possible to increase tax avoidance in these companies. The production or sale of a variety of products (diversification) is bigger and has more complex organizational structures that increase the cost of management and non-management decisions, making it difficult for companies to coordinate their policies.
Thematic classification: G10, M41
Keywords
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- Andrés, Pablo de. Fuente, Gabriel de la and Velasco, Pilar. (2014). Growth opportunities and ‎the effect of corporate diversification on value. The Spanish Review of Financial Economics. 12(2). ‎‎72-81.‎ DOI: https://doi.org/10.1016/j.srfe.2014.02.001
- ‎Anıl, Ä° and YiÄŸit, I. (2011). The Relation between Diversification Strategy and Organizational ‎Performance: A Research on Companies Registered to the Istanbul Stock Exchange Market. Procedia ‎‎- Social and Behavioral Sciences. 24, pp 1494-1509‎â€.†DOI: https://doi.org/10.1016/j.sbspro.2011.09.093
- Ansoff, H.I. (1975). Strategies for diversification. Harvard Business Review, 35, 113-124.
- Chen, Y & Zolotoy, L. (2014). Stock Liquidity and Corporate Tax-Avoidance: The Tale of ‎Two Tails. Retrieved from: http://ssrn.com/abstract:2320966 or ‎http://dx.doi.org/10.2139/ssrn.2320966.‎ DOI: https://doi.org/10.2139/ssrn.2320966
- Chyz, J., Gaertner, F., Kausar, A & . Watson, L. (2015). Overconfidence and Aggressive ‎Corporate Tax Policy. Retrieved from: http://ssrn.com/abstract=2408236.‎ DOI: https://doi.org/10.2139/ssrn.2408236
- Demirkan, Sebahattin; Radhakrishnan, Suresh and Urcan, Oktay. (2013). Discretionary ‎Accruals Quality, Cost of Capital, and Diversification. Retrieved from: ‎http://ssrn.com/abstract=817364.‎
- Desai, M. A., and D. Dharmapala.) 2006(. Corporate tax avoidance and high-powered incentives. Journal of Financial Economics 79: 145-179. DOI: https://doi.org/10.1016/j.jfineco.2005.02.002
- Didar, H., Imani Barandaq, M. & Shah Rezaei, S. (2013). The impact of business diversification on performance and value of companies listed in the Tehran Stock Exchange. Journal of Asset Management and Financing, 2(2), 65-86.
- Elhiraika, A.B., Mbate, M.M. (2014). Assessing the determinants of export diversification in Africa. Applied Econometrics and International Development, 14-1, 147-162.
- Erickson, M. M., & Wang, S. W. (2007). Tax Benefits as a Source of Merger Premiums in ‎Acquisitions of Private Corporations. The Accounting Review 82, 359-387.‎ DOI: https://doi.org/10.2308/accr.2007.82.2.359
- ‎Francis, B., Sun, X & Wu, Q. (2013). Managerial ability and tax avoidance. Retrieved from ‎‎https://www.ssrn.com/abstract=2348695‎ DOI: https://doi.org/10.2139/ssrn.2348695
- Graham, J., Tucker, A. (2006). Tax shelters and corporate debt policy. Journal of Financial ‎Economics, 81, 563–594.‎ DOI: https://doi.org/10.1016/j.jfineco.2005.09.002
- Hemmati, H. & Yousefi Rad, Z. (2013). The relationship between diversification strategy and the value of cash holding level with abnormal returns in companies listed in Tehran Stock Exchange. Quarterly Journal of Empirical Financial Accounting Studies, 11(37), 127-148.
- Hemmati, H., Sarraf, F. & Dehqani, M. (2015). The relationship between tax avoidance and abnormal delay in approving the annual profits of companies listed in Tehran Stock Exchange. Quarterly Journal of Economics and Tax, 1(2), 155-171.
- Itzkowitz, J. (2013). Customers and cash: How relationships affect suppliers’ cash ‎holdings.Journal of Corporate Finance. 19, pp: 159-180.‎ DOI: https://doi.org/10.1016/j.jcorpfin.2012.10.005
- Karami, Sh., Rahnamye Roudposhti, F. & Diyanati Deylami, Z. (2016). Assessing the effect of tax avoidance on the awareness of reported profits of companies listed in Tehran Stock Exchange. Management Accounting Journal, 9(28), 15-37.
- Karimi, S. (2015). Investigating the effect of product diversity on the value of companies accepted in Tehran Stock Exchange. Master’s thesis. Yazd University.
- Khani, A., Imani, K. & Mollayi, M. (2013). Investigating the relationship between auditor expertise in industry and tax avoidance of companies listed in Tehran Stock Exchange. Quarterly Journal of Audit Knowledge, 13(51), 43-68.
- Khuruna & Muser w, institutional ownershipand tax aggressiveness. (2009). working paper. University of Missouri at Columbia. www.ssrn.com DOI: https://doi.org/10.2139/ssrn.1464106
- Maham, K., Talebi, B. & Alipour, S. (2012). Investigating the relationship between debt and earnings management. The 10th National Accounting Conference of Iran, Tehran Al-Zahra University, pp. 123-140.
- Maham, K., Talebi, B. & Alipour, S. (2013). Investigating the relationship between debts, diversification and earnings management in companies listed in Tehran Stock Exchange. The 11th National Accounting Conference of Iran. Ferdowsi University of Mashhad.
- Mazaheri, P. & Rezaei, F. (2016). Investigating the impact of transactions with related parties through major buyers and sellers of goods and services on corporate tax avoidance. Second International Conference on Accounting, Economics and Financial Management. Payam Noor University of Shahrekord.
- Noravesh, I. & Shirvani, R. (2007). Noravesh Accounting Dictionary. Fifth Edition. Tehran: Iman Publications.
- Noravesh, I., Nazemi, A. & Heydari, M. (2006). Accrual quality and profits with an emphasis on the role of accrual estimation error. Journal of Accounting and Auditing Review, 43, 135-160.
- ‎Rezaei, F. & Ja’fari Niyaraki (2015). The relationship between tax avoidance and fraud in corporate accounting. Tax Research Journal, 26(74), 109-134.
- Sa’ei, M. J. & Sari, M. A. (2013). Income tax payable in cash flow statement (a comparative study of national and international models). Tax Research Journal, 21(17), 57-78.
- Volkov, N.I., Smith, G.C., (2014). Corporate diversification and firm value during economic downturns. The Quarterly Review of Economics and Finance, 55(C), 160-175. DOI: https://doi.org/10.1016/j.qref.2014.08.002
- ‎Wang, x. (2010). Tax Avoidance, Corporate Transparency, and Firm Value. Department of ‎Accounting McCombs School of Business University of Texas at Austin: 51-52.‎ DOI: https://doi.org/10.2139/ssrn.1716474
- Yavari, H. (2012). Investigating the relationship between product diversification and financial performance of companies accepted in Tehran Stock Exchange for the period of 2001-2010. Master’s thesis. Faculty of Economics and Social Sciences. Al-Zahra University.
- Yeh, C.T.; Hung, C.C & Jhang, Y.S. (2013). The Impacts of Growth Opportunities, ‎Information Asymmetry, and Free Cash Flow on Corporate Diversification. International Journal of ‎Business and Management (IJBM). 1 (1), 29-41.‎
- ‎Zheng, S. (2017). Can Corporate Diversification Induce More Tax Avoidance ‎Practices?.Journal of Multinational Financial Management, vol. 41(C), pages 47-60. http://dx.doi.org/10.1016/j.mulfin.05.008‎ DOI: https://doi.org/10.1016/j.mulfin.2017.05.008
References
Andrés, Pablo de. Fuente, Gabriel de la and Velasco, Pilar. (2014). Growth opportunities and ‎the effect of corporate diversification on value. The Spanish Review of Financial Economics. 12(2). ‎‎72-81.‎ DOI: https://doi.org/10.1016/j.srfe.2014.02.001
‎Anıl, Ä° and YiÄŸit, I. (2011). The Relation between Diversification Strategy and Organizational ‎Performance: A Research on Companies Registered to the Istanbul Stock Exchange Market. Procedia ‎‎- Social and Behavioral Sciences. 24, pp 1494-1509‎â€.†DOI: https://doi.org/10.1016/j.sbspro.2011.09.093
Ansoff, H.I. (1975). Strategies for diversification. Harvard Business Review, 35, 113-124.
Chen, Y & Zolotoy, L. (2014). Stock Liquidity and Corporate Tax-Avoidance: The Tale of ‎Two Tails. Retrieved from: http://ssrn.com/abstract:2320966 or ‎http://dx.doi.org/10.2139/ssrn.2320966.‎ DOI: https://doi.org/10.2139/ssrn.2320966
Chyz, J., Gaertner, F., Kausar, A & . Watson, L. (2015). Overconfidence and Aggressive ‎Corporate Tax Policy. Retrieved from: http://ssrn.com/abstract=2408236.‎ DOI: https://doi.org/10.2139/ssrn.2408236
Demirkan, Sebahattin; Radhakrishnan, Suresh and Urcan, Oktay. (2013). Discretionary ‎Accruals Quality, Cost of Capital, and Diversification. Retrieved from: ‎http://ssrn.com/abstract=817364.‎
Desai, M. A., and D. Dharmapala.) 2006(. Corporate tax avoidance and high-powered incentives. Journal of Financial Economics 79: 145-179. DOI: https://doi.org/10.1016/j.jfineco.2005.02.002
Didar, H., Imani Barandaq, M. & Shah Rezaei, S. (2013). The impact of business diversification on performance and value of companies listed in the Tehran Stock Exchange. Journal of Asset Management and Financing, 2(2), 65-86.
Elhiraika, A.B., Mbate, M.M. (2014). Assessing the determinants of export diversification in Africa. Applied Econometrics and International Development, 14-1, 147-162.
Erickson, M. M., & Wang, S. W. (2007). Tax Benefits as a Source of Merger Premiums in ‎Acquisitions of Private Corporations. The Accounting Review 82, 359-387.‎ DOI: https://doi.org/10.2308/accr.2007.82.2.359
‎Francis, B., Sun, X & Wu, Q. (2013). Managerial ability and tax avoidance. Retrieved from ‎‎https://www.ssrn.com/abstract=2348695‎ DOI: https://doi.org/10.2139/ssrn.2348695
Graham, J., Tucker, A. (2006). Tax shelters and corporate debt policy. Journal of Financial ‎Economics, 81, 563–594.‎ DOI: https://doi.org/10.1016/j.jfineco.2005.09.002
Hemmati, H. & Yousefi Rad, Z. (2013). The relationship between diversification strategy and the value of cash holding level with abnormal returns in companies listed in Tehran Stock Exchange. Quarterly Journal of Empirical Financial Accounting Studies, 11(37), 127-148.
Hemmati, H., Sarraf, F. & Dehqani, M. (2015). The relationship between tax avoidance and abnormal delay in approving the annual profits of companies listed in Tehran Stock Exchange. Quarterly Journal of Economics and Tax, 1(2), 155-171.
Itzkowitz, J. (2013). Customers and cash: How relationships affect suppliers’ cash ‎holdings.Journal of Corporate Finance. 19, pp: 159-180.‎ DOI: https://doi.org/10.1016/j.jcorpfin.2012.10.005
Karami, Sh., Rahnamye Roudposhti, F. & Diyanati Deylami, Z. (2016). Assessing the effect of tax avoidance on the awareness of reported profits of companies listed in Tehran Stock Exchange. Management Accounting Journal, 9(28), 15-37.
Karimi, S. (2015). Investigating the effect of product diversity on the value of companies accepted in Tehran Stock Exchange. Master’s thesis. Yazd University.
Khani, A., Imani, K. & Mollayi, M. (2013). Investigating the relationship between auditor expertise in industry and tax avoidance of companies listed in Tehran Stock Exchange. Quarterly Journal of Audit Knowledge, 13(51), 43-68.
Khuruna & Muser w, institutional ownershipand tax aggressiveness. (2009). working paper. University of Missouri at Columbia. www.ssrn.com DOI: https://doi.org/10.2139/ssrn.1464106
Maham, K., Talebi, B. & Alipour, S. (2012). Investigating the relationship between debt and earnings management. The 10th National Accounting Conference of Iran, Tehran Al-Zahra University, pp. 123-140.
Maham, K., Talebi, B. & Alipour, S. (2013). Investigating the relationship between debts, diversification and earnings management in companies listed in Tehran Stock Exchange. The 11th National Accounting Conference of Iran. Ferdowsi University of Mashhad.
Mazaheri, P. & Rezaei, F. (2016). Investigating the impact of transactions with related parties through major buyers and sellers of goods and services on corporate tax avoidance. Second International Conference on Accounting, Economics and Financial Management. Payam Noor University of Shahrekord.
Noravesh, I. & Shirvani, R. (2007). Noravesh Accounting Dictionary. Fifth Edition. Tehran: Iman Publications.
Noravesh, I., Nazemi, A. & Heydari, M. (2006). Accrual quality and profits with an emphasis on the role of accrual estimation error. Journal of Accounting and Auditing Review, 43, 135-160.
‎Rezaei, F. & Ja’fari Niyaraki (2015). The relationship between tax avoidance and fraud in corporate accounting. Tax Research Journal, 26(74), 109-134.
Sa’ei, M. J. & Sari, M. A. (2013). Income tax payable in cash flow statement (a comparative study of national and international models). Tax Research Journal, 21(17), 57-78.
Volkov, N.I., Smith, G.C., (2014). Corporate diversification and firm value during economic downturns. The Quarterly Review of Economics and Finance, 55(C), 160-175. DOI: https://doi.org/10.1016/j.qref.2014.08.002
‎Wang, x. (2010). Tax Avoidance, Corporate Transparency, and Firm Value. Department of ‎Accounting McCombs School of Business University of Texas at Austin: 51-52.‎ DOI: https://doi.org/10.2139/ssrn.1716474
Yavari, H. (2012). Investigating the relationship between product diversification and financial performance of companies accepted in Tehran Stock Exchange for the period of 2001-2010. Master’s thesis. Faculty of Economics and Social Sciences. Al-Zahra University.
Yeh, C.T.; Hung, C.C & Jhang, Y.S. (2013). The Impacts of Growth Opportunities, ‎Information Asymmetry, and Free Cash Flow on Corporate Diversification. International Journal of ‎Business and Management (IJBM). 1 (1), 29-41.‎
‎Zheng, S. (2017). Can Corporate Diversification Induce More Tax Avoidance ‎Practices?.Journal of Multinational Financial Management, vol. 41(C), pages 47-60. http://dx.doi.org/10.1016/j.mulfin.05.008‎ DOI: https://doi.org/10.1016/j.mulfin.2017.05.008