The Effect of Advertising Cost on Tax Avoidance with Emphasis on the Role of Information Ambiguity and Ownership Concentration

Document Type : Research Paper

Author

Asistance Prof in Accounting, Department of accounting, Hashtrood Branch, Islamic Azad University, Hashtrood, Iran

Abstract

1- Introduction
 The advertising cost can be seen as the company's effort to brand and present the image of a good corporate citizen who observes ethical norms. Ownership concentration as a monitoring tool and information ambiguity as an agency problem can also strengthen or weaken the result of signaling through advertising. The purpose of this research is to investigate the effect of advertising costs on tax avoidance with an emphasis on information ambiguity and ownership concentration. The negative relationship between the advertising and tax avoidance can be stronger for firms that are less well-known, have higher information asymmetry, have ambiguous information, or have lower institutional ownership, indicating that these firms may be more concerned about the negative consequences of tax evasion relating to the benefits of their advertising. Arguably, the role of advertising in creating customer awareness and shaping corporate image and credibility among customers is less significant for companies that are less transparent, or face weaker external scrutiny due to smaller institutional ownership stakes. For these companies, the value of the advertising commitment is higher for tax avoidance. In this research, by documenting the intensity the effect of advertising on tax avoidance for companies that have less transparency and also have weaker governance or less external supervision, by posing the question of whether the effect of advertising cost on tax avoidance and the effect of ownership concentration as a monitoring tool and information ambiguity are an agency problem in this relationship or not? We are looking for the development of theoretical foundations in this field.
 
2- Hypotheses
Companies involved in intensive advertising are less likely to engage in aggressive tax avoidance for two reasons. First, companies that advertise intensively are more likely to have acquired brand equity and corporate reputation. Firms with higher reputations face higher potential costs of aggressive tax activities resulting from detection and fines, and suffer subsequent reputational damage. Second, intensive advertising firms are associated with a more transparent information environment that discourages tax planning activities because these activities essentially rely on an opaque environment to mask underlying intentions. If the shareholders are faced with information ambiguity about the future economic events or the forecast of the future cash flows of the company, this will bring a negative reaction of the capital market. Considering that the effectiveness of signaling in financial reporting is more in the complexity and information asymmetry, increasing the advertising cost and signaling in this way can reduce the negative reaction of the market and, on the other hand, for companies to manage the information space, will avoid the accumulation of negative news in conditions with high information ambiguity, and avoid opportunistic actions such as tax avoidance. The ownership structure under a strong corporate governance can create more coordination between the owners and managers interests by exercising more control over management decisions and directing limited resources for more added value, and by encouraging more participation of managers in social activities such as taxation. In accordance with the actual performance, it prevents behaviors that reduce the social credit of the company, including tax avoidance. Therefore, the three research hypotheses are:
H1: Advertising costs have a negative effect on tax avoidance.
H2: The information ambiguity intensifies the negative effect of advertising on tax avoidance.
H3: Ownership concentration weakens the negative effect of advertising on tax avoidance.
 
 3- Method
This research is one of correlational and post-event research, also, in terms of the purpose of the research, it is an applied research; the statistical population investigated in this research is all the companies admitted to the Tehran Stock Exchange and the investigated period was from 2013 to 2021. Among the 531 member companies of Tehran Stock Exchange, 163 companies were selected as a statistical sample using the systematic elimination method. 
 
4- Results
Results of research showed that the advertising cost has caused the reduction of tax avoidance (based on three models of effective tax rate, book tax difference, tax shelter), information ambiguity based on the book difference model of taxes and tax shelters has caused an increase in tax avoidance and the interactive effect of information ambiguity with advertising cost has intensified its effect on tax avoidance, ownership concentration has caused an increase in tax avoidance (based on the model of effective tax rate and book tax difference), and also the interactive effect of ownership concentration and advertising cost has caused a further increase in tax avoidance (based on all three models). 
 
5- Discussion and Conclusion
Based on the result of the first hypothesis, on the one hand, because advertising increases market expectations, reduces the information gap and, as a result, reduces the information asymmetry between people inside and outside the organization, it increases the supervisory power of investors and customers in the market.  On the other hand, the studied companies refrain from using tax avoidance strategies and opportunistic behaviors to strengthen corporate citizenship, for branding, maintaining the benefits obtained through advertising. According to the results of the second hypothesis, under conditions of information ambiguity, managers' motivation to take opportunistic actions in order to save costs, maintain liquidity and tax avoidance and present a better image of the company to potential investor’s increases. However, the interactive effect of information ambiguity and the cost of advertising shows that companies use advertising as a tool to reduce information inequality and align with market expectations to prevent the accumulation of negative news and its destructive effect on the company's value in conditions of information ambiguity. They avoid opportunistic behavior in these conditions such as tax avoidance. According to the result of the third hypothesis, the interactive effect of ownership concentration and advertising has caused a further increase in tax avoidance, which indicates the opportunistic approach of managers in the shadow of weak leadership and exerting more influence or greater alignment of major owners with managers in strategic decisions. The participation and incentive of the management to risk taking is more and as a result, the potential effect of advertising in marking a good corporate citizen and observing ethical standards is reduced and it causes the superiority and preference of personal interests over the interests of tax avoidance.
 
 
 
 

Keywords

References

 
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History

  • Receive Date: 11 February 2023
  • Revise Date: 22 August 2023
  • Accept Date: 05 July 2023

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