The role of Tax Avoidance in Increasing the Risk of Companies Listed on the Tehran Stock Exchange

Document Type : Original Article

Authors

1 Corresponding author: Assistant Professor, Department of Accounting, Mashhad Branch, Islamic Azad University, Mashhad, Iran

2 Azad Mashhad University

3 Islamic Azad University

Abstract

Applying tax minimization policies can increase uncertainty about future tax payments due to uncertainty in the tax situation and thus increase the company's risk. However, if a company maintains a consistently low effective tax rate, it is unlikely that this corporate tax policy will increase the company's risk; But if tax minimization leads to instability in the tax situation, it will increase the company's risk. Low tax rates can also increase uncertainty about future cash flows. In this study, the relationship between tax avoidance and corporate risk (future fluctuations in tax rates and future fluctuations in stock returns) is investigated. The research is applied in terms of purpose and using a post-event approach and is correlational based on the method. Two hypotheses have been developed based on theoretical foundations in the direction of research objectives and by selecting 148 companies in the years 2014 to 2020 (1036 firm-year) these hypotheses have been tested. The results of testing the hypotheses show that there is a direct relationship between tax avoidance and tax rate fluctuations and the relationship between tax avoidance and future fluctuations in stock returns is not significant. Based on these results, it can be argued that tax avoidance carries tax risk, but due to the lack of specialization of the Iranian capital market, it cannot be considered effective in stock returns fluctuations.

Keywords

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Budget and Finance Strategic Research
Volume 3, Issue 2 - Serial Number 10
Summer Quarterly
November 2022
Pages 187-214

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History

  • Receive Date: 03 May 2022
  • Revise Date: 04 June 2022
  • Accept Date: 01 August 2022

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