The impact of managerial ability on corporate tax risk and long-run tax avoidance: empirical evidence from a developing country

Abstract

PurposeThe purpose of this study is to examine the impact of managerial ability on corporate tax risk and long-term tax avoidance using the upper echelons theory.Design/methodology/approachThis study uses a quantitative method with regression models, using a sample of listed firms on the Indonesia Stock Exchange from 2011 to 2018.FindingsThe regression results report that managerial ability negatively influences tax risk and positively impacts long-run tax avoidance. Companies with more able managers have a relatively lower tax risk and greater long-run tax avoidance. The results reveal that firms with managers that possess greater abilities are more committed to long-run tax avoidance while concurrently maintaining a lower level of their tax risk. The impacts the authors report are statistically significant and robust, as proved by a series of robustness checks and additional tests.Research limitations/implicationsThis study only includes firms from one developing country.Practical implicationsThe empirical results might be of interest to board members while envisaging the benefits and costs of appointing and hiring managers, as well as to the tax authority and the other stakeholders interested in apprehending how managerial ability influences corporate tax risk and long-run tax avoidance practices simultaneously.Originality/valueThis study proposes and tests an explanation for the impact of managerial ability on corporate tax risk and long-run avoidance simultaneously in the context of an emerging country.