Level Of Tax Avoidance,Agency Costs And Financial Risk

Taxation is a transfer of profits from a business to the government and can result in economic benefits flowing out of the business.As a result,some businesses will reduce their tax bill by means of tax avoidance.Traditional theory suggests that tax avoidance brings benefits to a business by reducing its tax costs and directly reducing cash outflows.However,enterprises need to pay back the tax and late payment fees when the tax avoidance behaviour if detected by the tax authorities.In severe cases,penalties can also be imposed.All of this can result in additional cash outflows and thus reduce the company’s financial risk tolerance.Furthermore,according to principal-agent theory,tax avoidance is often accompanied by opaque and complex transactions.Managers exacerbate the company’s financial risk by taking advantage of information asymmetries with shareholders in order to maximise their private interests.Therefore,it is worthwhile to investigate whether the benefits of tax avoidance are sufficient to offset the risks faced.This paper uses principal-agent theory as the main theoretical basis,while considering effective tax planning theory,information asymmetry theory and managerial incentives.This paper analyses the relationship between tax avoidance,agency costs and corporate financial risk through theoretical research.In the empirical study,this article takes the relevant data of A-share listed enterprises in Shanghai and Shenzhen from 2016 to 2020 as the scientific research sample.The article measures the degree of tax avoidance,financial risk and agency costs respectively using regressing total book-tax differences on total accruals(DDBTD),Z-score and Total Asset Turnover.Regressions were conducted using OLS models to analyse and test the relationship between the degree of tax avoidance and financial risk,as well as the degree of tax avoidance and agency costs.The intermediation effect test was conducted by following the steps summarised by Wen Zhonglin(2004)to examine the role of agency costs in mediating between the degree of tax avoidance and financial risk.Finally,robustness tests were conducted using alternative key variables to verify the reliability of the model.The results of the study and tests are as follows:(1)The degree of tax avoidance has a significant positive effect on financial risk.The greater the degree of tax avoidance,the greater the financial risk of the firm.(2)The degree of tax avoidance has a significant positive effect on agency costs.As the degree of tax avoidance increases,the agency cost will also increase significantly.(3)Agency costs play a mediating role between the degree of tax avoidance and financial risk.The degree of tax avoidance affects the financial risk of an enterprise through agency costs.This paper makes recommendations for enterprises based on the results of theoretical research and empirical analysis and combined with our own tax audit work experience:While the tax savings from tax avoidance will bring real cash savings to the enterprise,managers should consider the benefits and increased costs of tax avoidance and implement tax avoidance activities carefully.