The Relationship Between Corporate Diversification and Tax Avoidance: Empirical Evidence from the Emerging Economy of Pakistan

Abstract

Tax avoidance are the strategies that firms use to avoid their tax payments and rise their after-tax income. Recently, tax avoidance increase consideration in the modern research literature. In developing countries like Pakistan, taxes are a most important element to support the country’s budget and revenues. Therefore, this study tries to find the impact of corporate diversification on tax avoidance of listed firms in Pakistan stock exchange. For sample selection study use the 22 different sectors and select 129 companies based on availability of data. The time horizon of this study is 13 years started from 2006 to 2018 on annual basis. Study uses GAAPETR (tax expense / pre-tax income) to measure the tax avoidance besides entropy-index use for corporate diversification. To identify the long-term relationship between corporate diversification and tax avoidance study apply Johnson and Julius (1990) multivariate co-integration analysis. The results of Johnson and Julius (1990) approach shows that co-integration exist between corporate diversification and tax avoidance. Besides study use firm characteristics as control variables like leverage, firm profitability, ratio of capital expenditure and market to book ratio. Finally, study has policy implication for government, policy makers, regularity bodies, tax authority’s, investors and other stakeholders in Pakistan.