Around 2000, there were arguments in the US that it is necessary to increase book-tax conformity(BTC), and one of the reasons for this is that BTC will be positive in preventing corporate tax avoidance. Previous studies on the effect of BTC on tax avo...
Around 2000, there were arguments in the US that it is necessary to increase book-tax conformity(BTC), and one of the reasons for this is that BTC will be positive in preventing corporate tax avoidance. Previous studies on the effect of BTC on tax avoidance have limitations assuming that all companies in the same country(or industry) have the same BTC. And they implicitly assume that BTC is an exogenous variable that is not affected by ETR(effective tax rate). However, the ETR and BTC are likely to be determined endogenously because of the bidirectional positive causality between them, and if so, the OLS regression analysis used in previous studies can lead to misleading conclusions as the premise that the explanatory variable is independent of the dependent variable is not satisfied.
Based on the above, this study measures BTC for each individual firm, and investigates the real causality between BTC and ETR through 2-SLS regression analysis, to provide implication on the pros of BTC raised in terms of tax avoidance. The results of empirical analysis for the non-financial companies listed in KOSPI say that the ETR and BTC are influenced by each other, and so, there is a bidirectional positive causality between them. These results suggest that the BTC's positive effect of preventing tax avoidance may be much smaller than that implied by the empirical results of previous studies, and therefore, more careful judgment would be needed on the pros of BTC raised in terms of tax avoidance.