Complementary level of financial and tax aggressiveness and the impact on cost of debt: A cross-country study

Nurul Aisyah Rachmawati, Sidharta Utama, Dwi Martani, Ratna Wardhani

Research output: Contribution to journalArticlepeer-review

Abstract

Managers can take advantage of the flexibility of accounting choices to act opportunistically through financial aggressiveness and/or tax aggressiveness. The higher the complementary level of financial and tax aggressiveness, the higher the risk arising from the levels of error or fraudulent reporting carried out by such firms (fraud risk). This study aims to examine the impacts of the complementary level of financial and tax aggressiveness on the cost of debt. We estimate these relationships with a two-stage estimator method using 7 200 firm-year samples from East Asia and Europe for the period 2014 to 2016. In the first stage, a binary logistics model is used to examine the factors that influence the complementary level of financial and tax aggressiveness. Then in the second stage, we use a regression model to examine the effect of the complementary level of financial and tax aggressiveness on the cost of debt. We find that the complementary level of financial and tax aggressiveness has a positive and significant effect on the cost of debt, meaning that the higher the complementary level of financial and tax aggressiveness, the higher the cost of debt faced by firms. Creditors perceive the practice of financial and tax aggressiveness as a significant firm risk, thus tending to increase the cost of the debt they provide.

Original languageEnglish
Pages (from-to)161-176
Number of pages16
JournalSouth African Journal of Accounting Research
Volume37
Issue number3
DOIs
Publication statusAccepted/In press - 2022

Keywords

  • complementary level
  • cost of debt
  • financial aggressiveness
  • tax aggressiveness

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