Corporate governance: Does it matter for tax rationalization?  An empirical analysis of Pakistani firms

Muhammad Khurram Shabbir; Ishtiaq Ahmed; Aijaz Mustafa Hashmi

doi:10.33897/fujbe.v8i1.700

Muhammad Khurram Shabbir PhD Scholar, Department of Management Sciences, NUML Islamabad
Ishtiaq Ahmed Assistant Professor, Department of Management Sciences, NUML Islamabad
Aijaz Mustafa Hashmi

DOI: https://doi.org/10.33897/fujbe.v8i1.700

Keywords: Corporate Governance Mechanism, Firm Characteristics, Corporate Tax Avoidance

Abstract

This paper examines how the corporate governance mechanisms impact the tax
avoidance rationale of public limited firms of Pakistan. Tax avoidance has grown in
significance in policymaking. This study extends the literature by providing a perspective
from a developing country, Pakistan, particularly with a unique data set of its listed
firms. The study adds interest by investigating mechanisms for corporate governance and
how they influence tax avoidance. In the study sample size consists of 295 non-financial
firms at the Pakistan stock exchange (PSX) from 2016 to 2020. The regression results
indicated that the mechanisms for corporate governance do influence the tax avoidance
of the publicly listed firms of Pakistan. Specifically, it was found that the number of the
board’s independent directors and the external audit fee had a significant negative
association with the effective tax rates. While the other variables, such as board political
connections, board expertise, compensation, institutional shareholding and, big4
affiliation were insignificant. The control variables, liquidity, and firm age had a
significant positive association with the annual effective tax rate, while leverage had a
negative association. The firm size was insignificant. The findings of this study are
informative for lawmakers and suggest the importance of corporate governance in
reducing tax avoidance practices.