Abstract
This study aims to investigate the effects of managerial ability (MA) on the trade-off between tax and nontax costs in the sustainability perspectives of firms. An effective tax planning for corporate sustainability is to consider tax and financial reporting costs at the same time and find the optimal cost balance that exists between these two costs. MA is measured by the data envelopment analysis (DEA) frontier and Tobit regression model. DEA frontier methods can be measured by capturing the changes in market value, excluding the characteristics of firms, which are beyond management control. The interest variables of this study are tax costs, nontax costs, and the trade-off between them. This study has three main findings. First, a significantly positive relationship exists between MA and the tax cost variable. Second, a significantly negative relationship exists between MA and the nontax cost variable. Third, MA has a negative relation with the trade-off between tax and nontax costs. Therefore, this study is the first to analyze the relationship between MA and the trade-off between tax and nontax costs. This study implies that a manager should consider the trade-off between tax and nontax costs to improve the firm’s value as MA is reflected by tax and financial reporting simultaneously.
Highlights
IntroductionDoes managerial ability (hereby, MA), which most prior studies have used interchangeably with efficiency, affect efficient tax planning? MA in this study represents the pure discretionary ability of managers after removing firm-specific characteristics from managerial efficiency, while managerial efficiency is the ability to utilize the limited resources of a firm efficiently for deriving maximum output
Does managerial ability, which most prior studies have used interchangeably with efficiency, affect efficient tax planning? MA in this study represents the pure discretionary ability of managers after removing firm-specific characteristics from managerial efficiency, while managerial efficiency is the ability to utilize the limited resources of a firm efficiently for deriving maximum output
The major variables in this study model are TAX, which refers to tax costs, and NONTAX, which refers to nontax costs
Summary
Does managerial ability (hereby, MA), which most prior studies have used interchangeably with efficiency, affect efficient tax planning? MA in this study represents the pure discretionary ability of managers after removing firm-specific characteristics from managerial efficiency, while managerial efficiency is the ability to utilize the limited resources of a firm efficiently for deriving maximum output. Managers are continuously making decisions to increase the value of their firms by using limited resources [1,3]. Given that tax planning is a managerial decision-making activity in a typical business environment, the analysis of differences in corporate tax planning based on MA is a crucial subject for analyzing the differences in managerial activities [4]. The purpose of management decision-making is to maximize the firm’s value and secure its sustainability. This study attempts to determine the trade-off between tax and nontax costs such as financial reporting costs, costs related to moral hazard, litigation costs, etc., assuming that managers will consider maximizing the firm’s value when making tax-related decisions. The specific demographic characteristics of managers that are related to tax planning could not be identified. The level of tax avoidance is affected by the manager, and tax planning changes [3]
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