The mediation effects of financial distress on the relationship between capital intensity and return on assets towards corporate tax avoidance / Siti Nasuha Muhmad, Che Ku Hisam Che Ku Kassim and Nur Raihana Mohd Sallem

This paper investigated the relationship of capital intensity (CAPINT) and return on assets (ROA) on corporate tax avoidance (CTA) level among public listed companies. However, prior literature has failed to recognise the role of financial distress (FDR) in influencing the relationship between firm characteristics and CTA. Therefore, this paper enriches the existing literature by providing evidence on the role of FDR as a mediator in exploring the influence of company characteristics on CTA level. A balanced panel data set of 477 firm years-observations for the period from 2010 to 2019 was used. The data was retrieved from ThompsonOne Data Stream database. The statistical results confirmed a significant relationship between CAPINT and ROA with CTA level. This implied that such corporate traits can be used as a red flag to identify aggressive tax planners, who can then be investigated further for potential tax fraud. Moreover, it was also evident that FDR had a considerable effect on the relationship between CAPINT and ROA towards CTA level among the sampled companies. Because prior studies have often focused on the relationship between financial determinants and CTA, there appeared to be a dearth of studies stressing the mediating effects of FDR on the relationship between company characteristics and the extent of CTA.