Relationship Customer Concentration and Tax Avoidance by the Moderating Role of Managers Ability

Document Type : Research Paper

Authors

1 Department of Accounting, Faculty of Humanities, Islamic Azad University, Qom, Qom, Iran

2 Department of Accounting, Islamic Azad University of Natanz, Faculty of Humanities, Isfahan, Natanz

3 Natanz branch Azad university

Abstract

Companies with a major customer concentration due to high business risk (risk of losing major customers) require additional cash holdings. A tax avoidance can reduce the cash outflow and create additional cash for the company. The main objective of this research is to investigate the relationship between concentration on major customers and tax evasion in companies admitted to the Tehran Stock Exchange. To measure tax evasion (effective tax rate), the ratio of the tax expense tax to net profit before deduction of tax, for the customer concentration on the ratio of major sales (sales above 10%), and for measuring the variable power of managers from the model of Damirian et al. (2012) has been used. This research is a quasi-experimental and post-event type in the field of accounting proof research and is a kind of applied research. Linear regression model has been used to test the research hypotheses. The research community is included 130 companies selected by Cochran formula in the Tehran Stock Exchange during the period 2011 to 2016. The results of statistical tests of the first hypothesis showed that there is a negative and significant relationship between customer concentration and tax avoidance. In other words, in major customer companies, higher effective tax rates and tax avoidance have been lower. Also, the results of the study showed that the managers power as a moderating variable, weakens the relationship between customer concentration and tax avoidance.

Keywords

References

Banerjee, S. , Dasgupta, S. , Kim, Y. (2008). Buyer-supplier relationships and the stake- holder theory of capital structure. Journal of Finance 63, 2507–2552.
Baik, B. , Farber, D. , Lee, S. (2011). CEO ability and management earnings forecasts. Contemporary Accounting Research, 28 (5) , 1645–1668.
Berger, P. G. , Ofek, E. , Yermack, D. L. (1997). Managerial entrenchment and capital structure decisions. Journal of Financ. 52 (4) , 1411–1438.
Banker, R. D. , Darrough, M. N. , Huang, R. , Plehn-Dujowich, J. M. (2013). The relation between CEO compensation and past performance. The Accounting Review, 88 (1) , 1–30.
Carter, M. E. , Franco, F. , Tuna, I. (2010). Premium pay for executive talent: An empirical analysis. Working paper. Boston College.
Cohen, D. A. , Li, B. (2013). Why do Firms Hold Less Cash?. The University of Texas at Dallas Working paper.
Chang, Y. Y. , Dasgupta, S. , Hilary, G. (2010). CEO ability, pay, and firm performance, Management Science, 56 (10) , 1633–1652.
Desai, M. A. , Dharmapala, D. (2009). Corporate Tax Avoidance and Firm Value, Review of Economics and Statistics, 91, 537–546.
Demerjian, P. , Lev, B. , McVay, S. (2012). Quantifying managerial ability: A new measure and validity tests. Management Science, 58 (7) , 1229–1248.
Demerjian, P. , Lev, B. , Lewis, M. F. , & McVay, S. (2013). Managerial ability and earnings quality. The Accounting Review, 88 (2) , 463–498
De, J. A. , Verbeek, M. , & Verwijmeren, P. (2012). Does financial flexibility reduce investment distortions? Journal of Financial Research, 35, 243–259.
Dhaliwal, D. , Judd, J. S. , Serfling, M. A. , Shaikh, S. A. (2016). Customer concentration risk and the cost of equity capital. Journal of Accounting and Economics 61 (1) , 23–48.
Dhaliwal, D. , Michas, P. N. , Naiker, V. , Sharma, D. (2014). Major Customer Reliance and Auditor Going-Concern Decisions. University of Arizona Working Paper.
Foroughi, D. , Mohammadi, SH. (2012). Investigating the relationship between tax avoidance and value and the level of cash holdings of companies admitted to Tehran Stock Exchange, Tax Revenue Research, 20, 122-101. (In Persian).
Gallemore. J,. Labro,. E. (2015). The importance of the internal information environment for tax avoidance, Journal of Accountingand Economics 60,149–167.
Gan. , H. Park. , M. S. (2017). CEO managerial ability and the marginal value of cash, Advances in Accounting, Vol. 38, PP. 126–135
Gosman, M. , Kelly, T. , Olsson, P. , Warfield, T. (2004). The profitability and pricing of major customers. Review of Accounting Studies 9 (1) , 117–139.
Gosman, M. , Kohlbeck, M. (2009). Effects of existence of identity of major customers on supplier profitability: is Wal-Mart different? Journal of Management Accounting Research, 21, 179–201.
Harris, M. , Holmstrom, B. (1982). A theory of wage dynamics. Review of Economic Studies, 49, 315–333.
HassniAl-Qar, M. , Marfou, M. (2015). Investigating the Impact of Management Ability on Dividend Policies. Accounting Experimental Research, 3, 129-103. (In Persian).
HassniAl-Qar, M. , SheriAnaghiz, S. (2016). Investigating the Impact of Managing Ability to Avoid Tax. Accounting Knowledge, 1, 134-107. (In Persian).
Hertzel, M. , Li, Z. , Officer, M. , Rodgers, K. (2008). Inter-firm linkages and the wealth effects of financial distress along the supply chain. Journal of Financial Eco- nomics 87, 374–387.
Huang, H. , Lobo, G. , Wang, C. , Xie, H. (2016). Customer concentration and corporate tax avoidance, Journal of Banking and Finance 72 (4) , 184–200.
Jiang, Z. , Lie, E. (2016). Cash holding adjustments and managerial entrenchment, Journal of Corporate Finance 36 (2016) 190–205.
Kalwani, M. U. , Narayandas, N. (1995). Long-term manufacturer-supplier relationships: do they pay offfor supplier firms? Journal of Marketing 59, 1–16.
Khajavi, SH. , Kiamehr, M. (2015). Tax avoidance modeling using accounting information, Accounting Knowledge, 25, 79-100. (In Persian).
Khanlari, M. , Sohrabi, M. (2012). Investigating the relationship between corporate characteristics and tax avoidance, Audit Knowledge, 45, 69-50. (In Persian).
Khoddamipour, A. , Bazrayi, Y. (2014). Effect of product market competition on avoidance of taxation of listed companies in Tehran Stock Exchange. Tax Research journal, 27, 227-211. (In Persian).
Koester, A. , Shevlin, T. , & Wangerin, D. (2017). The role of managerial ability in corporate tax avoidance. Management Science, 63 (10) , 3285-3310. Kurdestani, GH. , Abbasi, A. (2013). Investigating the Impact of Customer Cocentration on Corporate Financial Performance, Asset Management and Financing, 3, 87-92. (In Persian).
Lee, C. C. , Wang, C. W. , Chiu, W. C. , Tien. , T. S. (2018). Managerial ability and corporate investment opportunity, International Review of Financial Analysis, 57, 65–76
Malmendier, U. , & Tate, G. (2005). CEO Overconfidence and Corporate Investment. The Journal of Finance, 60, 2661-2700.
Noga, T. J. , Schnader, A. L. (2013). Book-tax differences as an indicator of financial distress. Accounting Horizons 27, 469–489.
Patatoukas, P. N. (2012). Customer-base concentration: implications for firm perfor- mance and capital markets. The Accounting Review 87, 363–392.
Piercy, N. , Lane, N. (2006). The underlying vulnerabilities in key account management strategies. European Management Journal 24, 151–162.
Raman, K. , Shahrur, H. (2008). Relationship-specific investments and earnings man- agement: evidence on corporate suppliers and customers. The Accounting Review 83, 1041–1081.
Ravenscraft, D. (1983). Structure-profit relationships at the line of business and industry level. Review of Economics and Statistics 65, 22–31.
Rego, S. , and Wilson, R. (2012). Equity risk incentives and corporate tax aggressiveness. Journal of Accounting Research, 50, 775-809.
Richardson, G. , & Lanis, R. (2007). Determinants of the variability in corporate effective tax rates and tax reform: Evidence from Australia. Journal of accounting and public policy, 26 (6) , 689-704.
Sheybani, A. , Khoddamipour, A. (2018). Investigating the Adverse Effect of Real Earnings Management on the Relationship between Customer concentration and Tax Avoidance-Evidence from Tehran Stock Exchange, Knowledge of Accounting, 33, 129-103. (In Persian).
Sheybani, A. , Khoddamipour, A. , Pourheidari, O. (2018). Investigating the Impact of Customer concentration on Tax Avoidance with Considering the Company's Market Share, Accounting and Auditing Reviews, 2, 232-215. (In Persian).
Titman, S. , Wessels, R. (1988). The Determinants of capital structure choice. The Journal of Finance 43, 1–19.
Wang, J. (2012). Do firms' relationships with principal customers/suppliers affect shareholders' income?. Journal of Corporate Finance, 18 (4) , 860-878.

Files

History

  • Receive Date: 18 October 2018
  • Revise Date: 16 June 2019
  • Accept Date: 28 January 2019

Share

How to cite

Statistics