The Relationship of Corporate Tax Avoidance, Cost of Debt and Institutional Ownership: Evidence from Pakistan

Abstract

The core aim of the paper is to find out the correlation between corporate tax avoidance (CTA) and the Cost of debt (COD). Furthermore, its aim is to determine if institutional ownership plays the role of moderating Variable or not. To test these hypotheses, a sample of 65 Companies, listed in the PSX during the period of 2014 to 2019 is analyzed, which consists of five-year pre-Covid period. The results of study finds that there is negative relationship between corporate tax avoidance and cost of debt. Moreover, the empirical results demonstrate a noteworthy and positive linkage between corporate tax avoidance and the cost of debt specifically within Pakistani firms. These results shed light on the relationship between tax avoidance and debt costs, highlighting the potential tax avoidance activities. Examining the subject matter, this study investigates the moderating impact of institutional ownership in the relationship of dependent and independent variable. moreover, the empirical findings suggest that the moderating variable which is institutional ownership doesn’t significantly affect the relationship of Cost of debt and corporate tax avoidance. This study indicates that there is substantial impact of dependent variable of Research on the independent variable. Two hypotheses are developed after thorough review of the literature and three research questions are used in the study. The results support first hypothesis and rejects the second hypothesis on the basis of outcomes. This indicates that corporate tax avoidance significantly impacts borrowing cost but institutional ownership doesn’t affect the relationship of corporate tax avoidance and cost of debt.