Components of book tax differences, corporate social responsibility and equity value

Abstract

This study examines the relationship between components of book-tax differences (BTD), corporate social responsibility (CSR) and market value of equity in Malaysia. The sources that impact BTD are unclear as previous studies incline to focus on aggregated BTD. By analysing the data of 373 Malaysian non-financial public-listed companies from 2008 to 2015 using balanced-panel regression models, the findings provide evidence on shareholders’ valuation of permanent and temporary differences in the presence of CSR. Consistent with legitimacy theory, in which companies are theorised to conduct activities to appear legitimate in the eye of the shareholders, CSR is found to affect equity value positively. This suggests that the companies achieve their objectives to appear legitimate through CRS activities. As permanent differences and temporary differences imply the extent of companies’ tax planning activities through strategic and deferral tax planning, this study finds negative relationship between permanent differences and temporary differences, and equity value. This suggests that the shareholders are reluctant to incrementally value tax planning activities through permanent differences and temporary differences due to the activities’ inherent risk. In addition, this study finds shareholders simultaneously and positively value permanent and temporary differences, when CSR and the BTD components interact, suggesting that the strength of the initial relationships between permanent differences, temporary differences and equity value are depending on the company’s CSR engagement.

Keywords:

• book tax differences
• corporate social responsibility
• equity value
• permanent differences
• statutory tax rates differences
• temporary differences

PUBLIC INTEREST STATEMENT

This paper examines shareholders’ valuation of the components of book-tax differences in the presence of corporate social responsibility. Specifically, permanent differences, temporary differences and statutory tax rate differences are analysed for their direct and moderating roles in the equity valuation of a company with the presence of CSR. This research is significant to its field as it can provide an indicator to the Malaysian government in assessing the current tax regime in their effort to reduce the national tax gap. As CSR is often observed to be critical in influencing the tax strategies of a company, the former is introduced into the study as a moderating variable on the relationship between components of book-tax differences and equity value. Therefore, the findings of this study are useful to the public and authority to assess the effectiveness of CSR in influencing shareholders’ valuation on the gaps between tax theoretically due and tax actually collected at the micro level.

Notes

1. The full description for the indicators used for each aspect is disclosed by Thomson Reuters on https://uvalibraryfeb.files.wordpress.com/../asset4_esg_data_glossary_april2013.xlsx.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Tye Wei Ling

Tye Wei Ling is a lecturer at Taylor’s Business School, Taylor’s University, Malaysia. Her research interest includes taxation, CSR and market valuation. Email: [email protected]

Nor Shaipah Abdul Wahab is the Associate Professor and Head of Department of Accounting at Taylor’s Business School, Taylor’s University, Malaysia. Her research interests are taxation, corporate governance and market valuation. Email: [email protected]