Abstract
This paper examines the effect of industry-wide factors such as product market competition on corporate tax avoidance. Specifically, the focus is on the moderating role of corporate governance in the relationship between product market competition and tax avoidance. To conduct an empirical analysis, a sample of public companies that are listed on the Korea Stock Exchange between 2001 and 2016 is used. The empirical analyses provide the following results. First, product market competition is negatively related to tax avoidance. This suggests that competitive markets act as external corporate governance mechanisms and discipline managers to decrease tax avoidance. Second, the negative association between product market competition and tax avoidance is more pronounced for firms with more independent board of directors and firms with audit committee consisting of outside directors. These findings imply that product market competition acts more effectively when the firm has strong internal governance mechanisms such as board independence and audit committee independence. Therefore, we provide evidence on a complementary relationship between internal governance system and product market competition. The results may be of interest to policy makers and regulators like Korea Fair Trade Commission and Financial Supervisory Service who are involved in promoting market competition, monitoring any abuse of market dominance, and supervising financial reporting quality.
Highlights
A corporation or a limited company is a business entity characterized by the separation of ownership from management that aims to maximize expertise and efficiency
This paper examines the effect of product market competition on corporate tax avoidance
We investigate how the relationship between product market competition and tax avoidance is affected by corporate governance
Summary
A corporation or a limited company is a business entity characterized by the separation of ownership from management that aims to maximize expertise and efficiency. We examine how the relationship between product market competition and tax avoidance is affected by various internal corporate governance mechanisms as follows: (1) independence of board of directors, (2) audit committee, (3) independence of audit committee members, (4) foreign investor ownership. Investigating how managerial behavior is influenced by product market competition using Korean data could enable us to control for other corporate governance mechanisms As a result, this will minimize the endogeneity problem and ensure a valid inference about the effect of product market competition on tax avoidance. We find that foreign investor ownership has no significant influence on the association between product market competition and tax avoidance These findings indicate that product market competition acts more effectively when the firm has strong internal governance mechanisms such as an independent board of directors and audit committee. Less efficient firms may be able to maintain substantial market shares in protected market segments (p. 614)”
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