A Review on Transparency in Financial Reporting and its Effects on Tax Avoidance and Firm Value

Abstract

Tax avoidance, which results in a reduction in outgoing cash flows from the firm to the government, has long been considered as a value by shareholders. The general overview on tax avoidance indicates that the opportunistic managers, who seek to avoid tax payments, are using opacity in their financial reporting as a means to take financial advantages and mainly toward their own personal interests too. Transparency in financial reporting results in ease of supervision for shareholders on the performance of managers. Also, opportunistic managers use other methods and techniques to pay lesser tax which will cause the owners of the firms to bear certain costs. To shed light on the viewpoints about the disagreement between shareholders and managers, I have used the opacity criteria in financial reporting as well as different scales to measure tax avoidance in order to analyze how corporate transparency relates to tax avoidance. The hypotheses suggest that tax avoidance is negatively associated with corporate transparency and firm value. These analyses have been based on the financial data obtained from 100 listed companies in the Tehran Stock Exchange from 2002 to 2010 employing the multiple linear regression method. The results suggest that there is a negative meaningful relationship between tax avoidance and corporate transparency and also firm value.

Keywords: Corporate Transparency, Tax Avoidance, Firm Value

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