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Tax Avoidance, Tax Risk, and Corporate Governance: Evidence from Korea

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  • Jihwan Choi

    (Department of Accounting, Hanyang University, Seoul 04763, Korea)

  • Hyungju Park

    (Department of Accounting, Hanyang University, Seoul 04763, Korea)

Abstract

This study examines the association between the effective corporate tax rate and the volatility of future effective corporate tax rates in Korean companies. We analyzed the effect of corporate governance on the association between tax avoidance and tax risk. Our sample is comprised of all the firms listed on the Korea Composite Stock Price Index market. We measure each firm’s tax avoidance as GAAP ETR, Cash ETR, and BTD, and use the corporate governance rating of the Korea Corporate Governance Service to measure corporate governance. Our results show that the volatility of the effective corporate tax rate and the effective corporate tax rate would have a significant negative association. Our results show that tax risk decreases when the corporate tax avoidance level increases and the tax risk increases when the corporate tax avoidance level decreases. In addition, we find that the better the corporate governance structure, the higher the level of supervision and control of managers, thereby mitigating the impact of tax evasion on future corporate tax risk. The findings of this study regarding tax avoidance and corporate governance are important for investors because tax risk can significantly affect investor welfare.

Suggested Citation

  • Jihwan Choi & Hyungju Park, 2022. "Tax Avoidance, Tax Risk, and Corporate Governance: Evidence from Korea," Sustainability, MDPI, vol. 14(1), pages 1-16, January.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:1:p:469-:d:716424
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    References listed on IDEAS

    as
    1. Hasan, Iftekhar & Hoi, Chun Keung (Stan) & Wu, Qiang & Zhang, Hao, 2014. "Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans," Journal of Financial Economics, Elsevier, vol. 113(1), pages 109-130.
    2. Hasan, Iftekhar & Hoi, Chun Keung (Stan) & Wu, Qiang & Zhang, Hao, 2014. "Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans," Journal of Financial Economics, Elsevier, vol. 113(1), pages 109-130.
    3. repec:zbw:bofrdp:2014_003 is not listed on IDEAS
    4. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
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    Cited by:

    1. Lee, Gun & Chun, Hongmin, 2025. "North Korea threat risk, Korean business groups and corporate tax avoidance," Finance Research Letters, Elsevier, vol. 74(C).
    2. Nita Andriyani Budiman & Bandi Bandi & Ari Kuncara Widagdo & Eko Arief Sudaryono, 2025. "The evolution of tax strategies in multinational companies: a historical perspective," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 22(3), pages 745-758, September.
    3. Jamel Eddine Mkadmi & Arem Say & Sana Saida, 2022. "The Impact of Internal Governance Mechanisms on Tax Risk in Developing Countries: An Empirical Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 12(5), pages 86-94, September.

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