Corporate Governance, Tax Planning and Firm Value

Silvy Christina and Nico Alexander

Trisakti School of Management, Jakarta, Indonesia

Keywords: Corporate Governance, Tax Planning, Firm Value.

Abstract: This study examined the influence of corporate governance and tax avoidance on firm value and moderating

effect of corporate governance on the relationship between tax planning and firm value. The data cover 37

manufacturing companies listed in Indonesia Stock Exchange (BEI) for the period of 2014 to 2016.

Empirical analyses are conducted using multiple regression and path analysis to identify the presence of

moderating variable. The result shows that corporate governance has a positive effect on firm value, which

means the greater the corporate governance in companies, higher the firm value. Tax planning has a

negative effect on firm value, which means the higher tax expense the lower the firm value. For moderating

effects, the result shows that corporate governance does not moderate the relationship between tax planning

and firm value.

1 INTRODUCTION

The purpose of establishing a company is to make a

profit. The greater the profit generated by the

company, the higher the value of the company seen

in the company's stock price. Therefore management

tries to increase company profits. In addition to

increasing the value of the company, large profits

also show management's performance in managing

its assets to generate profits. If the resulting profit

gets smaller, then the management performance is

considered bad and vice versa: if the resulting profit

is higher the management performance is considered

good. Many methods are attempted by a

management to increase company profits with one of

them making efficiency in tax payments. According

to Nike et al., (2014), there are several ways to

reduce the tax burden that must be paid, namely tax

planning, tax avoidance, and tax evasion. Tax

planning and tax avoidance is a fairly safe way to do

it because it does not violate taxation rules. This is

different from tax evasion which actually violates

the prevailing tax rules. According to Suandy

(2011), tax planning is an effort made to save and

minimize tax payments legally without violating

applicable rules. In addition to tax planning, to

increase the value of the company, companies can

implement good corporate governance. Better

corporate governance provides protection to

shareholders against manipulating financial

statements so as not to harm investors.

Based on several research results such as Nike et

al., (2014), Wahab and Holland (2012), Winanto and

Utoyo (2013) state that tax planning does not affect

the value of the company, because tax planning

activities are considered as practicing earnings

management so as to not increase the value of the

company. However, according to Fajrin et al.,

(2018), Oyeyemi and Babatunde (2016), Zemzem

and Ftouhi (2016), and Zemzem and Ftouhi (2013),

tax planning has a negative effect on firm value

which means that the smaller the tax payment the

higher the value of the company. According to the

results of research by Zemzem and Ftouhi (2016) the

existence of corporate governance will increase the

value of the company. Because the results of

research on tax planning and corporate governance

on the value of the company produce results that are

inconsistent, and investors are now starting to invest

a lot of money in companies. Therefore the value of

the company must be increased to attract investors,

one way to do that is with tax planning and

corporate governance. So, this is the motivation of

this research, and this research also looks at whether

corporate governance moderates the influence of tax

planning with firm value.

Christina, S. and Alexander, N.

Corporate Governance, Tax Planning and Firm Value.

DOI: 10.5220/0008491102330237

In Proceedings of the 7th International Conference on Entrepreneurship and Business Management (ICEBM Untar 2018), pages 233-237

ISBN: 978-989-758-363-6

233

1.1 Agency Theory

In agency theory, the parties involved are the

management of a company, acting as agents, and the

investors, acting as principals. The agent and the

principals have different interests, and the principal

relies on the agent to protect those interests (Godfrey

et al., 2010). Jensen and Meckling (1976) stated that

the separation between the owners and managers of

a company may cause agency problems or conflicts.

Because the agent and the principal have different

interests, the principal have to spend on the costs of

agency, including: (1) the monitoring expenses

incurred by the principal to supervise the behavior of

agents, (2) the bonding expenses incurred by the

agent to ensure that the agent will not act in a way

that harms the principals interests, and (3) the

residual loss in the form of decreased levels of well-

being, for both parties.

1.2 Tax Planning and Firm Value

According to Pohan (2013) tax planning is the

process of organizing personal and corporate

taxpayer businesses by utilizing loopholes that can

be taken by companies in the corridor of the

provisions of taxation regulations. Thus, the

company can pay taxes in the minimum amount.

According to Zemzem and Ftouhi (2016), Oyeyemi

and Babatunde (2016), Zemzem and Ftouhi (2013),

Fajrin et al., (2018) stated that tax planning

negatively affect firm value. This shows that the

smaller the payment of corporate taxes the higher

the value of the firm. If a company is able to reduce

tax payments it will make the profits generated by

the company greater so investors will be interested

in buying company shares.

Based on the explanation

above, the hypothesis built is:

: Tax planning negatively affects firm value

1.3 Institutional Ownership and Firm

Value

Institutional ownership is the ownership of company

shares by institutions (pension funds, investment

companies, banks and others). According to Parrino

et al., (2003), Ferreira and Matos (2008), Alfaraih et

al., (2012), Fazlzadeh et al., (2011) and Uwuigbe

dan Olusanmi (2012), institutional ownership

positively affects firm value. The greater the

institutional ownership, the higher the value of the

company will be. According to Chung et al., (2002),

institutional ownership has an important role in

monitoring management so as not to take

opportunistic actions for personal interests so the

value of the company will increase. Based on the

explanation above, the hypothesis built is:

Institutional ownership positively affects firm

value

1.4 Board of Director and Firm Value

In this study the board of directors is a supervisor in

the company or also called the board of

commissioners, where the board of commissioners is

an organ in corporate governance that oversees

management in managing the company. According

to Andres and Vallelado (2008), the board of

directors has a positive effect on firm value. This

shows that the more the number of board of directors

in the company the higher the value of the company

because it will improve supervision, governance,

and increase returns (Andres and Vallelado 2008).

Based on the explanation above, the hypothesis built

is:

Board of director positively affects firm value

1.5 Independent Board and Firm Value

The independent board is a member of the Board of

Commissioners who has no relationship with the

company. According to Trisnantari (2010) and

Amyulianthy (2012), the independent board has a

positive effect on firm value. This shows that the

greater the number of independent boards, the higher

the value of the company, because the independent

board is able to carry out the monitoring function to

oversee the policies and activities carried out by the

directors. The existence of an independent board in

the company can provide an effective contribution in

the process of preparing more high quality financial

statements (Muryati and Suardika 2014). Based on

the explanation above, the hypothesis built is:

Independent board positively affects firm value

1.6 Corporate Governance Moderates

the Relationship between Tax

Planning and Firm Value

In this study, we also wanted to test whether

corporate governance moderates the influence of tax

planning with firm value. Based on the results of

Zemzem and Ftouhi (2013), Nike et al., (2014),

Wahab and Holland (2012) and Winanto and Utoyo

(2013), corporate governance is able to strengthen

the negative influence of tax planning on firm value.

This is because companies that have good

ICEBM Untar 2018 - International Conference on Entrepreneurship and Business Management (ICEBM) Untar

234

governance coupled with minimum tax payers will

increase the value of the company. Based on the

explanation above, the hypothesis built is:

: Corporate governance strengthens negative

effect of tax planning on firm value

2 METHODOLOGY

The paper employs a panel set data of manufacturing

firm listed in Indonesia Stock Exchange during the

period 2014-2016. The data taken uses purposive

sampling and consists of 37 manufacturing

companies. Below is a sample selection table.

Table 1: Sample procedure selection.

Description

Number of

companies

Number

of data

Manufacturing companies that are

consistently listed on the Indonesia

Stock Exchange during the 2014-2016

period