Strategic Adaptations and Tax Strategies: How Earnings Response Coefficient Shapes Corporate Tax Avoidance

Abstract

Purpose: This study examines the effect of tax strategies and business strategies on tax avoidance, with the Earnings Response Coefficient (ERC) as a moderating variable. The research aims to determine whether firms' tax planning decisions are influenced by their business strategies and whether investor sensitivity to earnings (ERC) constrains aggressive tax avoidance practices.

Methodology: The study employs panel data regression analysis on a sample of publicly listed manufacturing firms in Indonesia from 2019 to 2022. The panel least squares method is used to estimate the relationships between tax strategies, business strategies, ERC, and tax avoidance, with an interaction term included to assess the moderating effect of ERC.

Findings: The results indicate that tax strategies have a significant positive effect on tax avoidance, confirming that firms implementing aggressive tax strategies engage in higher levels of tax minimization. However, business strategies do not significantly affect tax avoidance, suggesting that tax planning decisions are not strongly influenced by a firm’s competitive positioning but rather by financial and regulatory factors. Furthermore, ERC significantly moderates the relationship between tax strategies and tax avoidance, implying that firms with higher investor sensitivity to earnings engage in lower tax avoidance due to greater market scrutiny. Conversely, ERC does not moderate the relationship between business strategies and tax avoidance, reinforcing the idea that investor perception of earnings does not influence firms’ tax behavior based on strategic orientation.

Implications: These findings have significant implications for regulators, investors, and corporate managers. Tax authorities should focus on strengthening compliance mechanisms, as tax strategies are a key driver of tax avoidance. Investors should consider ERC as an indicator of earnings transparency, as firms with high ERC are less likely to engage in aggressive tax planning. Corporate executives should ensure that tax strategies align with long-term financial sustainability, as excessive tax avoidance may lead to regulatory penalties and reputational risks.

Originality/Value: This study contributes to the literature on corporate tax planning and financial strategy by providing empirical evidence on the role of tax strategies, business strategies, and investor sensitivity in shaping tax avoidance behavior. Unlike previous research, this study incorporates ERC as a moderating variable, highlighting the role of market discipline in constraining aggressive tax planning.