Browse > Article
http://dx.doi.org/10.13106/jafeb.2021.vol8.no12.0129

Tax Planning, Financial Constraints and Investment Management: Empirical Evidence from Pakistan  

BUTT, Muhammad Naveed (Department of Business Administration, Faculty of Management Sciences, Foundation University Islamabad)
MALIK, Qaisar Ali (Department of Business Administration, Faculty of Management Sciences, Foundation University Islamabad)
WAHEED, Abdul (Department of Business Administration, Faculty of Management Sciences, Foundation University Islamabad)
TABASSUM, Aftab Hussain (Department of Business Administration, Faculty of Management Sciences, Foundation University Islamabad)
Publication Information
The Journal of Asian Finance, Economics and Business / v.8, no.12, 2021 , pp. 129-139 More about this Journal
Abstract
The aim of this study is to provide insight into tax avoidance through planning and management, and its investment consequences in financially constrained and unconstrained firms, as well as to empirically examine the interrelationships between the variables studied. Data was extracted from the financial statement analysis of non-financial companies listed on the Pakistan stock exchange (PSX) published by the State Bank of Pakistan, covering ten major manufacturing sectors. KZ index and WW index are used to identify financially constrained and unconstrained firms. Tax avoidance is measured by using GETR and LETR. All the equations are estimated through panel data regression models using common, fixed, and random effects. The empirical investigation of the role of tax avoidance in all firms collectively and constrained and unconstrained firms separately showed that the tax avoidance behavior of these firms is translated into investments by these firms. The study will help policymakers in strategy formulation and implementation related to tax planning and investment decisions in constrained and unconstrained firms to overcome their financial constraints and to optimize their investment decisions for value maximization. This will substantially increase the investment in the country by providing growth opportunities and lowering the tax rates.
Keywords
Tax Avoidance; Financial Constraints; Investments; Cash Flows; Pakistan;
Citations & Related Records
연도 인용수 순위
  • Reference
1 Almeida, H. M., Campello, M., & Weisbach, M. S. (2004). The cash flow sensitivity of cash. Journal of Finance, 59(4), 1777-1804. https://doi.org/10.1111/j.1540-6261.2004.00679.x   DOI
2 Chen, L., & Zhao, X. (2006). On the relation between the market-to-book ratio, growth opportunity, and leverage ratio. Finance Research Letters, 3(4), 253-266. https://doi.org/10.1016/j.frl.2006.06.003   DOI
3 Dhaliwal, D. S., Huang, S. X., Moser, W. J., & Pereira, R., (2011). Corporate tax avoidance and the level and valuation of firm cash holdings. SSRN Journal, 19, 76. http://doi.org/10.2139/ssrn.1905076   DOI
4 Kadapakkam, R. R., Kumar, P. C., & Riddick, L. A. (1998). The impact of cash flows and firm size on investment: the international evidence. Journal of Banking & Finance, 22, 293-320. https://doi.org/10.1016/S0378-4266(97)00059-9   DOI
5 Keynes, J. M. (1936). The general theory of employment, interest, and money. London: Palgrave Macmillan.
6 Kim, J. B., Li, V. Y., & Zhang, L. (2010). Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of Financial Economics, 100(3), 639-662. https://doi.org/10.1016/j.jfineco.2010.07.007   DOI
7 Koester, A. (2011). Investor valuation of tax avoidance through uncertain tax positions. SSRN Journal, 11(2), 44-59. http://doi.org/10.2139/ssrn.1905210   DOI
8 Lamont, O., Polk, C., & Saa-Requejo, J. (2001). Financial constraints and stock returns. Review of Financial Studies, 14, 529-54. https://doi.org/10.2139/ssrn.113336   DOI
9 Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting & Economics, 50(2/3), 127-178. https://doi.org/10.1016/j.jacceco.2010.09.002   DOI
10 Gupta, S., & Newberry, K. (1997). Determinants of the variability in corporate effective tax rates: Evidence from a longitudinal study. Journal of Accounting and Public Policy, 16(1), 1-34. https://doi.org/10.1016/S0278-4254(96)00055-5   DOI
11 Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance 43(1), 1-21. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x   DOI
12 Waheed, A., & Malik, Q. A. (2021). Institutional ownership board characteristics and firm performance a contingent theoretical approach. International Journal of Asian Business and Information Management, 12(2), 1-15. https://doi.org/10.4018/IJABIM.20210401.oa1   DOI
13 Kim, M, Chang, S., David, C. M., & Sherman, A. E. (1998). The determinants of corporate liquidity: Theory and evidence. Journal of Financial and Quantitative Analysis, 33, 335-359. https://doi.org/10.2307/2331099   DOI
14 Li, D. (2011). Financial constraints, R&D investment, and stock returns. The Review of Financial Studies, 24(9), 2974-3007. https://www.jstor.org/stable/20869332   DOI
15 Mayberry, M. (2012). Tax avoidance and investment: distinguishing the effects of capital rationing and overinvestment [Doctoral thesis, Texas A&M University]. Oak Trust. https://oaktrust.library.tamu.edu/handle/1969.1/148121
16 Shackelford, D. A., & Shevlin, T. (2001). Empirical tax research in accounting. Journal of Accounting & Economics, 31(1-3), 321-387. https://doi.org/10.1016/S0165-4101(01)00022-2   DOI
17 Wang, X. (2010). Tax avoidance, corporate transparency, and firm value [Doctoral thesis, The University of Texas at Austin]. The University of Texas Libraries. http://hdl.handle.net/2152/ETD-UT-2010-12-2219
18 Faulkender, M., & Wang, R. (2006). Corporate financial policy and the value of cash. Journal of Finance, 61, 1957-1990. https://doi.org/10.1111/j.1540-6261.2006.00894.x   DOI
19 Dyreng, S., Hanlon, M., & Maydew, E. (2010). The effects of executives on corporate tax avoidance. The Accounting Review, 85(4), 1163-1189. https://www.jstor.org/stable/20744155   DOI
20 Kaplan, S., & Zingales, L. (1997). Do financing constraints explain why investment is correlated with cash flow? Quarterly Journal of Economics, 112, 169-215. https://www.jstor.org/stable/2951280   DOI
21 Graham, J. R., & Tucker, A. L. (2006). Tax shelters and corporate debt policy. Journal of Financial Economics, 81(3), 563-594. https://doi.org/10.1016/j.jfineco.2005.09.002   DOI
22 Dyreng, S., Hanlon, M., & Maydew, E. (2008). Long-run corporate tax avoidance. The Accounting Review, 83(1), 61-82. https://www.jstor.org/stable/30243511   DOI
23 Hanlon, M., & Slemrod, J. (2009). What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement. Journal of Public Economics, 93(1/2), 126-141. https://doi.org/10.1016/j.jfineco.2010.07.007   DOI
24 Livdan, D., Sapriza, H., & Zhang, L. (2009). Financially constrained stock returns. Journal of Finance, 64, 1827-62. https://doi.org/10.1111/j.1540-6261.2009.01481.x   DOI
25 Malik, Q., Hussain, S., Ullah, N., Waheed, A., Naeem, M., & Mansoor, M. (2021). Simultaneous equations and endogeneity in corporate finance: The linkage between institutional ownership and corporate financial performance. The Journal of Asian Finance, Economics, and Business, 8(3), 69-77. https://doi.org/10.13106/jafeb.2021.vol8.no3.0069   DOI
26 Fazzari, S., Hubbard, R. G., & Petersen, B. C. (1988). Financing constraints and corporate investment". Brookings Papers on Economic Activity, 1, 141-206. https://www.brookings.edu/wp-content/uploads/1988/01/1988a_bpea_fazzari_hubbard_petersen_blinder_poterba.pdf
27 Azam, M., & Shah, S. A. (2011). Internal financial constraints, external financial constraints and investment choice: Evidence from Pakistani firms. Australian Journal of Business and Management Research, 1(8), 18-22. http://ajbmr.com/articlepdf/AJBMR_17_37i1n8a3.pdf   DOI
28 Brainard, W. C., & Tobin, J. (1968). Pitfalls in financial model building. American Economic Review, 58(2), 99-122. https://www.jstor.org/stable/1831802
29 Chen, S., Chen, X., Cheng, Q., & Shevlin T. (2010). Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95(1), 41-61. https://doi.org/10.1016/j.jfineco.2009.02.003   DOI
30 Cheng, C., Huang, H., Li, Y., & Stanfield, J. (2012). The effect of hedge fund activism on corporate tax avoidance. The Accounting Review, 87(5), 1493-1526. https://doi.org/10.2308/accr-50195   DOI
31 Stein, J. C. (2003). Agency, information, and corporate investment. In: Constantinides, G., Harris, M., & Sultz, R. (Eds.), Handbook of the economics of finance (pp. 111-165). Amsterdams, Netherlands: Elsevier.
32 Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48(3), 261-297. https://www.jstor.org/stable/1809766
33 Myers, S. C., & Majluf, N. C. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13, 187-222. https://doi.org/10.1016/0304-405X(84)90023-0   DOI
34 Slemrod, J. (2004). The economics of corporate tax selfishness. National Tax Journal, 57, 877-99. https://doi.org/10.17310/ntj.2004.4.06   DOI
35 Waheed, A., & Malik, Q. A. (2019). Board characteristics, ownership concentration, and firms' performance. South Asian Journal of Business Studies, 8(2), 146-165. https://doi.org/10.1108/sajbs-03-2018-0031.   DOI
36 Whited, T., & Wu, G. (2006). Financial Constraints Risk. Review of Financial Studies, 19(2), 531-559. https://doi.org/10.1093/rfs/hhj012   DOI