Investigating the usefulness of Relief and correlation variable selection methods in predicting and identifying optimal predictor variables affecting aggressive tax policy

Document Type : Research Paper

Authors

1 Ph.D. Student of Accounting, Department of Accounting, Yasooj Branch, Islamic Azad University, Yasooj, Iran

2 Professor, Department of Accounting, University of Shiraz, Shiraz, Iran (Corresponding Author)

3 Assistant professor, Department of Accounting, Gachsaran Branch, Islamic Azad University, Gachsaran, Iran

Abstract

Introduction
The main issue in this research is the study of factors affecting aggressive tax policy and also modeling the factors affecting aggressive tax policy. The present study seeks to provide empirical evidence to compare the performance of methods such as correlation-based methods and relief with other models before reducing the variables in predicting aggressive tax policy criteria of companies listed on the Tehran Stock Exchange. In this regard, the usefulness of correlation and relief methods for selecting optimal predictor variables was also investigated and compared.
 
Hypotheses
The purpose of this study is to investigate the performance of relief and correlation-based linear methods in predicting the optimal predictor variables affecting aggressive tax policy. According to this aim and the theoretical foundations, the research hypotheses were formulated as follows:
Hypothesis 1: There is a significant difference between the predictive performance of aggressive tax policy using optimally selected predictor variables and the use of all predictor variables.
Hypothesis 2: There is a significant difference between the usefulness of variable selection methods in predicting aggressive corporate tax policy.
 
 Method
For this purpose, data related to 108 companies listed on the Tehran Stock Exchange for the period between 1389 to 1397 were used. The fixed effects pattern regression method was evaluated and tested using the panel data method. The sample includes 108 companies that were selected by elimination method (screening). The data were first sorted and classified in Excel software and then analyzed using EVIEWS software. Also, relief and correlation-based methods were used using VEKA software to select the optimal independent variables affecting taxation
 
 Results
The results of testing the first hypothesis showed that the error of the first and second types and the coefficient of determination for all primary variables and the correlation-based method and the relief method are equal to (0.080, 0.060 and 0.597), respectively (0.090, 0.064 and 0.511) and (0.089, 0.064 and 0.522) which indicate a significant difference between the methods of reducing the variable and all the main variables; As a result, the first hypothesis is confirmed.
Also, the error of the first and second types and the coefficient of determination for variable reduction methods including: correlation-based method, and relief method are equal to (0.090, 0.064 and 0.511) and (0.089, 0.064, respectively). And 0.522) and shows that the usefulness of Relief method> is based on correlation method and therefore it can be said that among the methods of reducing the variable Relief method is better useful and thus the second hypothesis is confirmed.
 
Discussion and Conclusion
The purpose of this study is to model the factors affecting tax planning in companies listed on the Tehran Stock Exchange. In this study, the measure of aggressive tax policy has been used to measure tax planning. Also in this research, two methods of variable reduction including (correlation-based method and Relief method) have been used to reduce the research variables and select the optimal variables.
The results indicate that there is a significant difference between estimating all research variables and using variable reduction methods. The results also show that the usefulness of Relief method in modeling the factors affecting aggressive tax policy is more than the correlation method. In addition, the results indicate that among the factors affecting various tax criteria, the uncertainty of macroeconomic variables have a positive and significant effect on aggressive tax policy;
In addition, the results showed that the uncertainty of macroeconomic variables has a positive and significant effect and the factors of audit quality, product market competition, and the characteristics of CEOs have a significant and negative effect on aggressive tax policy.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Keywords

References

Badertscher, B. A., Katz, S. P., & Rego, S. O. (2013). The separation of ownership and control and corporate tax avoidance. Journal of Accounting and Economics, 56(2-3): 228-250.
Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research,6(2): 159-178.
Bruce, D., Deskins, J., & Fox, W. (2007). On the extent, growth, and efficiency consequences of state business tax planning. In A. Auerbach, J. Hines, Jr., & J. Slemrod (Eds.), Taxing Corporate Income in the 21st Century (pp. 226-256). Cambridge: Cambridge University Press.
Chen, S., Chen, X., Cheng, Q., & Shevlin, T. (2010). Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95(1): 41-61.
Christensen, J., & Murphy, R. (2004). The social irresponsibility of corporate tax avoidance: Taking CSR to the bottom line. Development, 47(3): 37-44.
Chyz, J. A., Leung, W. S. C., Li, O. Z., & Rui, O. M. (2013). Labor unions and tax aggressiveness. Journal of Financial Economics, 108(3): 675-698.
Clance, M., Gozgor, G., Gupta, R., & Lau, C. K. M. (2021). The relationship between economic policy uncertainty and corporate tax rates. Annals of Financial Economics, 16(01): 2150002. doi:10.1142/s2010495221500020
Demerjian, P., Lev, B., McVay, S. (2012). Quantifying managerial ability: A new measure and validity tests. Management Science, 58(7): 1229-1248.
Desai, M., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives, Journal of Financial Economics, 79(1): 145-179.
Desai, M., & Dharmapala, D. (2009). Corporate tax avoidance and firm value. The Review of Economics and Statistics, 91(3): 537-546.
Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2010). The effects of executives on corporate tax avoidance. The Accounting Review, 85(4): 1163-1189.
Feller, A., & Schanz, D. (2017). The three hurdles of tax planning: How business context, aims of tax planning, and tax manager power affect tax expense. Contemporary Accounting Research, 34(1): 494-524.
Francis, B., Sun, X., & Wu, Q. (2013). Managerial ability and tax aggressiveness. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2348695
Frank, M. M., Lynch, L. J., & Rego, S. O. (2009). Tax reporting aggressiveness and its relation to aggressive financial reporting. The Accounting Review, 84(2): 467-496.
Gaspar, J.M., and Massa, M. (2006). Idiosyncratic volatility and product market competition. Journal of Business, 79(6): 3125-3152.
Hall, M. A. (1999). Correlation-based feature selection for machine learning. Ph.D Thesis, University of Waikato. Retrieved from https://www.cs.waikato.ac.nz/~mhall/thesis.pdf
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2-3): 127-178.
Hirshleifer, D., Low, A., & Teoh, S. H. (2012). Are overconfident CEOs better innovators? The Journal of Finance, 67(4): 1457-1498.
Hribar, P., & Collins, D. W. (2002). Errors in estimating accruals: Implications for empirical research. Journal of Accounting Research, 40(1): 105-134.
Huang, H., Sun, L., & Zhang, J. (2017). Environmental uncertainty and tax avoidance. Advances in Taxation, 24 (1): 83–124.
Huang, W., Ying, T., & Shen, Y. (2018). Executive cash compensation and tax aggressiveness of Chinese firms. Review of Quantitative Finance and Accounting, 51(4): 1151-1180.
Kalelkar, R., & Khan, S. (2016). CEO financial background and audit pricing. Accounting Horizons, 30(3): 325-339.
Kanagaretnam, K., Lee, J., Lim, C. Y., & Lobo, G. J. (2016). Relation between auditor quality and tax aggressiveness: Implications of cross-country institutional differences. Auditing: A Journal of Practice & Theory, 35(4), 105-135.
Kharuddin, K. A. M., Basioudis, I. G., & Al Farooque, O. (2021). Effects of the Big 4 national and city-level industry expertise on audit quality in the United Kingdom. Journal of International Accounting, Auditing and Taxation, 43, 100398. doi:10.1016/j.intaccaudtax.2021.100398
Kim, J. B., Wang, Z., & Zhang, L. (2016). CEO overconfidence and stock price crash risk. Contemporary Accounting Research, 33(4): 1720-1749.
Kira, K., & Rendell, L. A. (1992). A practical approach to feature selection. In Machine learning proceedings 1992 (pp. 249-256). Morgan Kaufmann.
Koester, A., Shevlin, T., & Wangerin, D. (2017). The role of managerial ability in corporate tax avoidance. Management Science, 63(10): 3285-3310.
Kubick, T. R., & Lockhart, G. B. (2017). Overconfidence, CEO awards, and corporate tax aggressiveness. Journal of Business Finance & Accounting, 44(5-6): 728-754.
Kubick, T. R., Lynch, D. P., Mayberry, M. A., & Omer, T. C. (2015). Product market power and tax avoidance: Market leaders, mimicking strategies, and stock returns. The Accounting Review, 90(2): 675-702.
Lanis, R., & Richardson, G. (2011). The effect of board of director composition on corporate tax aggressiveness. Journal of Accounting and Public Policy, 30(1): 50-70.
Lerner, A. (1934). The concept of monopoly and the measurement of monopoly power. Review of Economic Studies, 1(3): 157–175.
Liang, Q., Li, Q., Lu, M., & Shan, Y. (2021). Industry and geographic peer effects on corporate tax avoidance: Evidence from China. Pacific-Basin Finance Journal, 67(c), 101545, 1-25.
Lisic, L. L., Neal, T. L., Zhang, I. X., & Zhang, Y. (2016). CEO power, internal control quality, and audit committee effectiveness in substance versus in form. Contemporary Accounting Research, 33(3): 1199-1237.
Manzon, G.B. and Plesko, G.A. (2002). The relation between financial and tax reporting measures of income. Tax Law Review, 55(2): 175-214.
McGuire, S. T., Omer, T. C., & Wang, D. (2012). Tax avoidance: Does tax-specific industry expertise make a difference? The Accounting Review, 87(3): 975-1003.
Minnick, K., & Noga, T. (2010). Do corporate governance characteristics influence tax management? Journal of Corporate Finance, 16(5): 703-718.
Myers, J. N., Myers, L. A., & Omer, T. C. (2003). Exploring the term of the auditor‐client relationship and the quality of earnings: A case for mandatory auditor rotation? The Accounting Review, 78(3): 779-799.
Peress, J. (2010). Product market competition, insider trading and stock market efficiency. Journal of Finance, 65 (1): 1–43.
Randøy, T., & Jenssen, J. I. (2004). Board independence and product market competition in Swedish firms. Corporate Governance: An International Review, 12(3): 281-289.
Rego, S. O., & Wilson, R. (2012). Equity risk incentives and corporate tax aggressiveness. Journal of Accounting Research, 50(3): 775-810.
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.
Robnik-Šikonja, M., & Kononenko, I. (1997, July). An adaptation of Relief for attribute estimation in regression. In Machine learning: Proceedings of the fourteenth International Conference (ICML97). San Francisco, CA: Morgan Kaufmann.
Schrand, C. M., & Zechman, S. L. (2012). Executive overconfidence and the slippery slope to financial misreporting. Journal of Accounting and Economics, 53(1-2): 311-329.
Sharma, V. (2011). Stock returns and product market competition: Beyond industry concentration. Review of Quantitative Finance and Accounting, 37(3): 283-299.
Tijjani, B., & Peter, Z. (2020). Ownership structure and tax planning of listed firms: Evidence from Nigeria. Journal of Accounting and Taxation, 12(3): 99-107.
Tsai, C. F. (2009). Feature selection in bankruptcy prediction. Knowledge-Based Systems, 22(2): 120-127.
Urbanowicz, R. J., Meeker, M., La Cava, W., Olson, R. S., & Moore, J. H. (2018). Relief-based feature selection: Introduction and review. Journal of biomedical informatics, 85(9), 189-203.
Van Der Pilos, N. (2017). Tax avoidance and corporate governance does the board of directors' influence tax avoidance. Unpublished MSc thesis, department of: Accounting, Auditing & Control, Erasmus School of Economics, 1-39.
Wang. L. (2015). Tax enforcement, corporate tax aggressiveness, and cash holdings. China Finance Review International, 5(4): 339 – 370.
Wang, T. (2019). Product market competition and efficiency of corporate tax management. Asian Review of Accounting, 27(2): 247-272.
Zhao, Y., & Chen, K. H. (2008). Staggered boards and earnings management. The Accounting Review, 83(5): 1347-1381.
 
Journal of Accounting Advances
Volume 13, Issue 1 - Serial Number 81
October 2021
Pages 335-377

Files

History

  • Receive Date: 05 May 2021
  • Revise Date: 13 July 2021
  • Accept Date: 14 July 2021

Share

How to cite

Statistics