International Journal of Finance & Managerial Accounting

International Journal of Finance & Managerial Accounting

Tax avoidance and Firms Cost of Equity: The Moderating Role of outside Monitoring

Document Type : Original Article

Authors
Rohollah Ghelichli 1
mehdi safari gerayli 2
Mansoor Garkaz 3
1 Department of Accounting, Gorgan Branch, Islamic Azad university, Gorgan ,Iran.
2 Department of Accounting, Bandargaz Branch, Islamic Azad University, Bandargaz, Iran
3 Department of Accounting, Gorgan Branch, Islamic Azad university, Gorgan , Iran.
Abstract
Literature in tax avoidance indicates that the proceeds of tax avoidance can be invested on production affairs, which in turn enhance the future expected cash flow, thereby reducing the cost of equity. Based on this reasoning, the present study aims to examine whether tax avoidance is associated with the cost of equity with emphasis on the moderating effect of outside monitoring. To calculate tax avoidance, the effective tax rate is employed. Using a sample of 420 firm-year observations from 2011 to 2015 and after controlling for the effect of exogenous variables, to test the research hypotheses, multivariate regression model based on panel data was employed; the results indicate that tax avoidance is negatively and significantly associated with the cost of equity. In other words, firms, investing the proceeds of tax avoidance, increase their future expected cash flow and hence reduce the cost of equity. Moreover, outside monitoring moderates the relationship between tax avoidance and cost of equity. The findings of the study not only fill the research gap in the field, but also benefit investors, tax regulators and other stakeholders in decision making process.
Keywords
Tax Avoidance
Cost of Equity
outside monitoring
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International Journal of Finance & Managerial Accounting
Volume 2, Issue 5
Spring 2017
Pages 23-30