The role of sustainability reporting in

shareholder perception of tax avoidance

Astrid Rudyanto and Kashan Pirzada

Abstract Astrid Rudyanto is based at

Purpose – The purpose of this study is to examine the moderating effect of sustainability reporting on the the Department of
relationship between tax avoidance and firm value. This study also examines the moderating effect of Accountancy, Trisakti
sustainability reporting in both environmentally sensitive firms and non-environmentally sensitive firms. School of Management,
Design/methodology/approach – This research uses moderated panel regression with 596 Jakarta, Indonesia.
observations and 734 observations for cash effective tax rate (ETR) and generally accepted accounting Kashan Pirzada is based at
principles effective tax rate (GAAP ETR) of firms listed on the Indonesian Stock Exchange between 2014
the Department of
and 2016. Tax avoidance is measured by both cash ETR and GAAP ETR.
Accountancy, Universiti
Findings – This paper shows that sustainability reporting moderates the relationship between tax avoidance
Utara Malaysia, Sintok,
(GAAP ETR) and firm value. The results show that GAAP ETR has a negative association with firm value in
non-environmentally sensitive firms and a positive association with firm value in environmentally sensitive Malaysia.
firms. Consequently, the sustainability report alters only the effect of GAAP ETR on firm value in non-
environmentally sensitive firms. The results imply that, unlike environmentally sensitive firms, non-
environmentally sensitive firms need sustainability reporting to reduce the reputational costs of tax avoidance.
Originality/value – How shareholders view tax avoidance remains unclear; research on this topic often
fails to produce a uniform result. The present research fills this gap by using the existence of sustainability
reporting as proof of companies’ ethical motivations to moderate the association of tax avoidance and
firm value, which has not been discussed in previous research.
Keywords Sustainability reporting, Tax avoidance, Firm value, Environmentally sensitive industries
Paper type Research paper

1. Introduction
A strong reputation is widely recognised as the most valuable asset of a firm, and firms are
consistently aiming to improve their reputation. Firms must consider the possible effect of
every single decision on their reputation. A firm’s reputation depends on the good or bad
business ethics it displays (Cragg, 2002; Treviño, Hartman and Brown, 2012). One of the
decisions that reflects bad business ethics is avoidance of tax (Graham et al., 2014). Tax
avoidance is the reduction of explicit taxes (Dyreng et al., 2008; Hanlon and Heitzman,
2010). The reduction of explicit taxes can be the result of responsible tax management
(good business ethics) or irresponsible tax management (bad business ethics) (Hardeck
and Hertl, 2014). As stakeholders do not know the source of tax avoidance, they regard tax
avoidance as bad business ethics (Tanimura and Okamoto, 2013; Akhtar et al., 2019).
Tax avoidance reflects bad business ethics because tax avoidance reduces tax revenue
which is used for increasing societal welfare (Avi-Yonah, 2006; Mehrotra, 2014). As
stakeholders are a part of the society, tax avoidance decreases stakeholders’ welfare.
Therefore, stakeholders usually respond negatively to tax avoidance activities (Kim et al.,
2011; Gallemore et al., 2014). Received 20 January 2020
Revised 11 March 2020
6 April 2020
However, research shows that stakeholders can perceive tax avoidance as a positive act 29 April 2020
(Inger, 2014; Drake et al., 2019). Because tax avoidance decreases a firms’ tax burden, it Accepted 29 April 2020

DOI 10.1108/SRJ-01-2020-0022 © Emerald Publishing Limited, ISSN 1747-1117 j SOCIAL RESPONSIBILITY JOURNAL j
 will also increase the firms’ profitability and thereby benefit stakeholders, especially
shareholders (Jensen, 2001). In response to these different results, Brooks et al. (2016)
suggest that stakeholders can react positively to tax avoidance if shareholders perceive tax
avoidance as a commitment by management to protect their resources without
compromising stakeholder needs. Protecting resources without compromising stakeholder
needs is known as corporate social responsibility (CSR). As firms can increase stakeholder
welfare by conducting CSR activities; tax avoidance will be regarded as a money-saving
activity to pay for their CSR activities. In other words, the stakeholders’ reaction to tax
avoidance depends on how the firms assure stakeholders that they can increase their
profitability while engaging in CSR.
One of the ways firms report their CSR activities is through a sustainability report.
Sustainability reports show how firms protect their resources to meet present and future
needs with environmental protection activities and social empowerment thus impacting the
firms’ economic condition (Global Reporting Initiative, 2017). Although there are other types
of CSR reporting, sustainability reporting is the most complete and comprehensive
voluntary CSR report that requires the person preparing the report to understand the impact
of their business operations thoroughly (Du et al., 2017). As sustainability reporting is
voluntary and sometimes difficult to produce, firms that make sustainability reports are
companies that have good CSR activities. They make sustainability reports to signal that the
firm cares about stakeholder needs (Lys et al., 2015; Harmadji et al., 2018). By issuing
sustainability reports, tax avoidance will be regarded as result of good business ethics and
will not be considered as detrimental to stakeholders’ welfare. The tax savings produced by
may therefore be used for CSR activities (Davis et al., 2016).
Indonesia has unique CSR regulation. Firms listed on the Indonesian Stock Exchange are
obliged to incorporate a CSR report in their annual reports but are not required to publish a
separate sustainability report (Government of the Republic of Indonesia, 2007). This
regulation makes the submission of a separate sustainability report voluntary in Indonesia.
Hence, according to Rudyanto and Siregar (2018), the submission of a sustainability report
remains limited in Indonesia. From all stakeholders, this paper emphasises shareholders for
two reasons. Firstly, shareholders are the most important stakeholders of a firm, as a firms’
purpose is to maximise shareholders’ wealth and balance it with other stakeholders’ needs
(Man, 2015; Inger and Vansant, 2018). Secondly, shareholders’ reaction to information is
the most telling, as they have a financial interest in the firm and their reaction is reflected in
the financial market (Gitman and Zutter, 2013).
Previous research on tax avoidance and firm value has been inconclusive, both
internationally and within Indonesia. Some research studies conclude that tax avoidance is
positively associated with firm value as companies gain a benefit from tax avoidance
(Simone and Stomberg, 2012; Chen et al., 2014; Pratama, 2018). Other research studies
conclude that tax avoidance is negatively associated with firm value, as tax avoidance
impacts a companies’ reputation (Gallemore et al., 2014; Ni Made Ampriyanti and M, 2016;
Santana and Rezende, 2016; Baudot et al., 2019). Among these inconclusive results, other
research has concluded that information transparency can decrease the negative
association between tax avoidance and firm value (Wang, 2012; Alexander, 2013; Chen
et al., 2014), even in Indonesia (Ilmiani and Sutrisno, 2014). However, the method of
information transparency that previous studies used is all financial and non-financial
information transparency. Tax avoidance negatively impacts a companies’ reputation
because tax avoidance reduces tax revenue that is used to increase social welfare (Bird
and Davis-Nozemack, 2018).
As CSR increases social welfare (Kuhlman and Farrington, 2010; Markus and Shimshack,
2012), the most appropriate method of information transparency to increase a companies’
reputation is CSR information (Becchetti et al., 2009; Clacher and Hagendorff, 2012; Kuzey
and Uyar, 2017). CSR information signals that companies engage in tax avoidance to obtain

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tax savings, which they then use to engage in CSR activities. As sustainability reporting is
the most comprehensive form of CSR reporting, companies need more resources to
produce sustainability reports (Rudyanto and Siregar, 2018). In addition, sustainability
reporting is voluntary in Indonesia. Companies that do not pay attention to CSR will typically
not make sustainability reports (Reddy and Gordon, 2010; Kuzey and Uyar, 2017). Thus,
sustainability reporting can be a signal that tax saving is used to do CSR activities (Khurana
and Moser, 2013) and can decrease the negative effect of tax avoidance on firm value. To
our knowledge, no previous studies have analysed the role of sustainability reporting in
reducing the negative effect of tax avoidance on firm value.
The purpose of this research is to obtain empirical evidence in favour of the proposition that
the submission of voluntary sustainability reporting acts as an indication of an organisation’s
sustainability which might reduce shareholders’ negative reaction to tax avoidance. Before
analysing the role of sustainability reporting, this research analyses whether tax avoidance
is perceived negatively by shareholders in Indonesia as a result of the negative effect of tax
avoidance on firm value. This research contributes to the relevant literature by emphasising
the role of sustainability reporting as a means to ascertain a firms’ sustainability. The
relationship between CSR to tax avoidance and firm value has been studied previously by
Inger and Vansant (2018). While Inger and Vansant’s (2018) research indicates
the substitution relationship between tax avoidance and CSR activities on firm value, the
present research emphasises the moderating role of sustainability reporting on the
association between tax avoidance and firm value. As sustainability reporting is still a
voluntary practice in Indonesia, analysing the role of sustainability reporting in Indonesia will
improve our understanding of the role of voluntary reporting in altering shareholders’
perception of tax avoidance.
This research proceeds as follows. Section 2 discusses the literature review and
hypotheses development. Section 3 discusses the research method. Section 4 discusses
the results and analysis. Section 5 concludes this paper.

2. Literature review
The Caux Round Table (a code of ethics that sets consistent and attainable worldwide
guidelines for how business can behave responsibly and ethically) defines business ethics
as the reconciliation of private interests with the public good (welfare) (Young, 2003).
Corporate income tax is one mechanism used to reconcile firms’ private interest with the
public good (welfare) (Wegener and Labelle, 2017). By paying income tax, firms are
contributing to welfare by reallocating part of their wealth to be managed by government for
increasing social welfare. Avoiding income tax payment will reduce a firms’ contribution to
social welfare. Thus, tax avoidance is considered to be a violation of business ethics.
However, the relationship between business ethics and tax avoidance is not that
straightforward. Tax avoidance can be a result of responsible tax management or
irresponsible tax management (Hardeck and Hertl, 2014). Responsible tax management is
the act of paying your fair share of taxes. Responsible tax management will decrease a
firms’ tax expense but will not harm social welfare. Responsible tax management is a form
of good business ethics, as this act increases a firms’ profitability yet is not detrimental to
social welfare. An example of responsible tax management is a real decision that is tax-
favoured. Irresponsible tax management is the act of minimising tax payments by all means
possible to increase a firms’ profitability, regardless of whether the act will reduce social
welfare. This act is considered to be bad business ethics. An example of irresponsible tax
management is shifting profits to lower tax countries.
The problem is the source of tax avoidance is unknown by stakeholders. Agency theory
implies that firms need to make reports to reduce information asymmetry with stakeholders,
especially shareholders (Jensen and Meckling, 1976). As firms are obliged to report their

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 tax payment in financial statements, shareholders know the amount of the firms’ tax
avoidance (Government of the Republic of Indonesia, 2007). However, shareholders’
knowledge of firms’ tax payment is limited to the tax payment number, not the source of tax
avoidance. Without additional information about the source of tax avoidance, shareholders
will regard tax avoidance as bad business ethics, as tax avoidance is decreasing the firms’
contribution to social welfare (Prebble and Prebble, 2010; Raiborn et al., 2015). Research
shows that shareholders’ reaction to tax avoidance depends on the firms’ information
transparency (Chen et al., 2014; Goh et al., 2016). Firms need other reports to inform
shareholders about the source of tax avoidance.
Signalling theory states that a signal can only be given by firms that are better at
differentiating themselves from other companies (Spence, 2011). As firms have to sacrifice
their resources to make voluntary reports, voluntary reporting is only made by certain firms
(Arniati et al., 2019). Voluntary reports differentiate firms from one another. Therefore,
signals can only be given by making voluntary report (Francis et al., 2008). Firms which do
responsible tax management are firms that care for social welfare (Hardeck and Hertl,
2014). They constrain themselves to do irresponsible acts that can reduce social welfare. To
give a signal to shareholders that corporate tax avoidance comes from responsible acts,
firms need to make a sustainability report. Sustainability reporting is a comprehensive report
that shows a firm’s CSR activities. CSR activities are the proof that firms care for social
welfare. CSR activities are those that firms do as a form of responsibility for the impact of its
decisions and activities on society and the environment which can increase social welfare
(ISO, 2010). Although CSR activities may increase social welfare, not all CSR activities are
perceived positively by shareholders. Research shows that most firms in Indonesia still do
not understand CSR and regard it as purely philanthropic activity (Hendarto and Purwanto,
2012) that wastes firm’s resources. As they are obliged to make CSR activities and report
those activities, firms typically only report a small number of their philanthropic CSR
activities. Therefore, shareholders will respond more favourably to firms that understand
CSR and do more than philanthropic CSR activities.
Sustainability reporting urges firms to involve stakeholders in formulating the best CSR
activities firms can make to meet stakeholders’ needs (Ayuso et al., 2006; Fraser et al.,
2006). According to the signalling theory, voluntary sustainability reports are produced by
firms which understand CSR and have a strong system of CSR activities (Schreck and
Raithel, 2018). By making sustainability reports, firms in Indonesia can signal to their
shareholders that they undertake good CSR activities, not merely philanthropic activities.
Thus, shareholders react positively to sustainability reports. Sustainability reports also
provide signals by showing that firms use tax saving money to increase social welfare
directly by engaging in CSR activities (Davis et al., 2016). Research shows that
shareholders respond negatively to tax avoidance because it is a form of a CSR violation
(Antonetti and Maklan, 2016; DeZoort et al., 2018). If firms give additional information on
their CSR activities, shareholders will revise their perception on firms’ tax avoidance (Wang,
2012; Zeng, 2016).

2.2 Hypotheses development

In carrying out its operations, firms need to be responsible to a variety of stakeholders who
have different interests (Donaldson et al., 1995; Freeman and McVea, 2001). However, all of
them agree that firms have to increase social welfare (Donaldson et al., 1995; Zheng et al.,
2015). Firms contribute to social welfare by paying taxes. Governments allocate taxes paid
by firms to increase social welfare. However, paying taxes to the state can only increase
social welfare if government really use taxes to pay for the benefit of community (Alm and
Torgler, 2011), not to increase the wealth of a certain category of people. If the company
does not believe that the government can allocate taxes for the benefit of the community,
the company will avoid tax and use its money for tax avoidance to carry out its own CSR

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(Bird and Davis-Nozemack, 2018). This is what makes tax avoidance considered positive
by shareholders.
Research shows different results in shareholders’ perception on tax avoidance. Some
researches show that tax avoidance is positively associated with firm value because the
avoided tax burden increases shareholder wealth (Inger and Vansant, 2018), especially in
firms with good governance (Desai and Dharmapala, 2009). However, if shareholders see
tax avoidance as something that risks the firms’ sustainability, tax avoidance is negatively
associated with firm value (Inger, 2014). Research shows that tax avoidance is negatively
associated with firm value (Hanlon and Slemrod, 2009) because it reduces report
transparency (Hope et al., 2013; Donohoe and Robert Knechel, 2014; Balakrishnan et al.,
2019), thereby increasing the risk of a collapse in the company’s market price (Kim et al.,
2011).
Differences in shareholder perceptions of tax avoidance depend on two things, namely,
trust in the government and the ethics of tax. A government satisfaction survey conducted
by Indo Barometer shows that the level of satisfaction over the government during the
period of President Jokowi served (2014–2018) rose above that of the previous period
(Supriatin, 2018). The Kompas survey also shows that public satisfaction has continued to
increase in the administration of President Jokowi over the past four years, especially in the
area of social welfare (Jordan, 2018). This shows that the public believes that the
government is able to provide welfare through taxes paid by companies so that tax
avoidance can hamper sustainability. In relation to ethics of tax, Brooks et al. (2016) argue
that the perception of tax avoidance that was previously considered reasonable and
profitable has now become an ethical issue and is no longer acceptable. Tax avoidance is
seen by stakeholders as negative (DeZoort et al., 2018). Results from Indonesia also show
that tax avoidance has an adverse effect on firm value (Chasbiandani and Martani, 2011;
Ilmiani and Sutrisno, 2014).
Taken together, the preceding arguments imply that tax avoidance is seen by stakeholders
as negative, meaning tax avoidance practices and firm value are likely to be negatively
related, leading to the following hypothesis:
Ha1. Tax avoidance is negatively associated with firm value.
Sustainability reporting can decrease the negative association between tax avoidance and
firm value in two ways. Firstly, sustainability reporting signals a high level of ethics in the
firm. In Indonesia, the sustainability report is a voluntary report that is separate from the
annual report (Government of the Republic of Indonesia, 2007). As sustainability reporting is
voluntary, firms need more resources to produce sustainability reports. If firms are not
confident that their CSR activities are exceptional, they will not make sustainability reports.
Sustainability reporting also shows a firms’ superior CSR activities which they have to show
in voluntary reports. Signalling theory implies that the cost imposed by society to firms that
do not honestly report their CSR activities is a sufficient deterrent so that firms which do not
have superior CSR performance will be less likely to produce voluntary CSR reports
(sustainability reports) (Mahoney et al., 2013). By engaging in a high level of CSR activities,
firms show that they accept their ethical obligations beyond compliance with the law
(Gribnau, 2015). Superior CSR performance is a good indicator of a firms’ ethics. Tax
avoidance is an ethical issue because tax avoidance reduces tax revenue that is used by
governments to increase welfare (Avi-Yonah, 2006). If firms engage in tax avoidance while
voluntarily producing sustainability reports, they are able to reduce the negative perception
of their tax avoidance behaviours. This is further supported by the fact that private firms are
more efficient in increasing welfare than government (Polishchuk, 2009; McGee, 2010).
Secondly, sustainability reports show that tax payment reduction is coming from
responsible activities. Tax avoidance can stem from responsible acts and irresponsible
acts. Tax avoidance from irresponsible acts is regarded by shareholders as bad business

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 ethics (Desai and Dharmapala, 2009; Hanlon and Slemrod, 2009). Even though the
economic result of those acts is similar, responsible tax avoidance is seen as clever move
as responsible tax avoidance reduces tax liabilities that the firm should not be incurring
(Kirchler et al., 2003). Previous research shows that responsible tax avoidance is perceived
positively by shareholders (Inger, 2014; Drake et al., 2019). By default, tax avoidance is
regarded negatively by shareholders owing to the associated reputational risk and tax risk
that shareholders will ultimately bear (Gallemore et al., 2014; Baudot et al., 2019). However,
firms have other mechanisms to increase social welfare, such as through CSR activities. If
shareholders know that tax saving money is used to carry out CSR activities, shareholders
will have a positive perception of corporate tax avoidance. On one hand, sustainability
reports are the most comprehensive form of CSR reporting (Rudyanto and Siregar, 2018).
According to agency theory, sustainability reports reduce information asymmetry between
firms and stakeholders (Quick, 2008). Firms can use sustainability reports to inform
shareholders that money from tax avoidance is used for CSR activities. By providing
additional information about the source of tax avoidance, shareholders may alter their
perception of firms’ tax avoidance. Previous research shows that information transparency
reduces shareholders’ negative perception of tax avoidance (Wang, 2012; Chen et al.,
2014).
The focus of this study is the link between the existence of sustainability reports and the
reduction of the negative association between tax avoidance and firm value. As such, we
formulate the following hypothesis:
Ha2. The negative association between tax avoidance and firm value will be moderated
by sustainability reporting.

3. Research method
This study uses non-financial firms (but not oil and gas or property firms) that were
consistently listed on the Indonesian Stock Exchange from 2014 to 2017. Financial firms
were excluded because they were under tighter supervision and had different tax
structures. Property and oil and gas firms were also excluded because they are subject to
final tax, so there was no tax expenses reported. The existence of the G4 Global Reporting
Initiative Index, which was introduced in 2013, gave firms the choice to make core or
comprehensive reports. This choice ensured that the number of sustainability reports in
2014 increased dramatically. As the Indonesian Government adopted a regulation that
obliges public firms and financial institutions to produce a sustainability report, starting on 1
January 2019 (Rudyanto, 2019), this paper was limited to the year 2017. Year 2018 was
eliminated because firms were preparing to make mandatory sustainability reports to
publish in 2019. This research uses the year before sustainability reports are mandated
because the existence of mandatory sustainability reports do not give signal to
shareholders about companies’ care of social responsibility. If sustainability reports are
mandated, all companies should make sustainability report regardless of their level of social
responsibility activities. Signalling theory does not apply in this condition. The research
model is as follows:

Qi;t ¼ b 0 þ b 1TAXi;t þ b 2 SRi;t þ b 3 TAXi;t SRi;t þ b 4SIZEi;t þ b 5 GROWTHi;t

þ b 6 PPEi;t þ b 7 ROAi;t þ b 8 LEVi;t þ b 9 AGEi;t þ b 10 LIQi;t þ ei;t
(1)

Firm value was measured by Tobin’s q as of 31 March as financial statements were

released by 31 March at the latest (Inger and Vansant, 2018). As tax avoidance and other
control variables data came from financial statements, shareholders’ reaction could be seen
after the financial statement was released. Tax avoidance was measured by two
measurements, cash effective tax rate (ETR) and generally accepted accounting principles

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effective tax rate (GAAP ETR). ETR is a tax avoidance measure that can be interpreted
easily even by ordinary people so that busy shareholders can react quickly to differences in
ETR and statutory tax rates (DeZoort et al., 2018). Other measurements such as the book
tax difference or abnormal book tax difference do not reflect the amount of tax that is
directly borne or paid by the company (Hanlon and Heitzman, 2010). Cash ETR was
measured by dividing the cash tax paid and pre-tax income (Huseynov and Klamm, 2012;
McGuire et al., 2012; Dyreng et al., 2018; Drake et al., 2019), and GAAP ETR is measured
by dividing tax expenses and pre-tax income (Dyreng et al., 2010; Huseynov and Klamm,
2012; Graham et al., 2014; Kubick et al., 2016). Cash ETR and GAAP ETR have different
meanings. Cash ETR represents the real amount of cash tax saving, and GAAP ETR
represents the tax expense saving. The effect of cash ETR and firm value shows that
shareholders pay attention to cash tax saving, while the effect of GAAP ETR and firm value
shows that shareholders pay attention to tax expense saving. To facilitate interpretation,
cash ETR and GAAP ETR times 1. This means that the greater the ETR number, the
greater the tax avoidance.
Sustainability reports were assessed by the presence of sustainability reports issued by the
company in that year (1 if any and 0 if none). Because the number of sustainability reports
made by Indonesian companies is still limited (Rudyanto and Siregar, 2018) and tax
information of Indonesian companies is limited in DataStream, this paper uses the existence
of sustainability reports as a moderating variable. The use of sustainability reports will
reduce the number of samples and reduce external validity of the results. Sustainability
reports issued, for example, in 2014, were for firm value in 2014 as seen from the stock
price on 31 March 2015.
This research uses firm size, growth, plant assets, profitability, leverage, firm age
and liquidity as control variables. This study used firm size (SIZE) and profitability
(ROA) because companies that are large in size and are profitable tend to be more
valued by shareholders (Bebchuk et al., 2009). Firm size is measured by a natural
logarithm of total asset and profitability is measured by dividing the net income with
total asset (Inger and Vansant, 2018). Plant asset (PPE) was used as a control
variable as fixed assets indicate productivity (Inger and Vansant, 2018; Schreck and
Raithel, 2018). Plant assets are measured by dividing the gross property, plant and
equipment owned with total assets (Inger and Vansant, 2018). Sales growth
(GROWTH) was used as a control variable because growth opportunity is positively
related to firm value (Inger and Vansant, 2018). Sales growth was measured by
reducing this year’s sales and previous year’s sales divided by previous year’s sales
(Chen et al., 2015). Leverage, as measured by total debt divided by total assets, is
used to control the tax shield because debt provides a tax shield (Ghasempour and
bin Md Yusof., 2014). Firm age controls older companies’ existing growth (Loderer
and Waelchli, 2010; Dienes et al., 2016). Liquidity, measured by the amount of cash
and short-term investments divided by previous year’s assets, is used to control the
positive impact of liquidity on investors’ reactions to news about social responsibility
(Xu and Liu, 2018). All data was gathered from Thomson Reuters DataStream and
Eikon.
This study uses non-financial, non-oil and gas and non-property companies which were
consistently listed on the Indonesian Stock Exchange from 2014 to 2017, had profit in all
years and had complete data on Thomson Reuters. This paper also removed all firms which
had more than 100% of CASH ETR or GAAP ETR. Because previous studies show that the
type of industry was very influential on CSR (Patten, 1992; Sweeney and Coughlan, 2008)
and firms made sustainability reports because they mimicked their peers in the same
industry (Rudyanto and Siregar, 2018), this study uses fixed industries in the random effect
model. This study uses Thomson Reuters Industry Classification (TRBC). The regression is
analysed by STATA 14 (Table 1).

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 Table 1 Descriptive statistics
CASH ETR regression GAAP ETR regression
n mean SD min max n mean SD min max

Q 596 2.31 5.71 26.53 66.32 734 2.17 5.20 1.32 66.32
CASH/GAAP ETR 596 0.31 0.19 1.89E-5 0.99 734 0.29 0.15 0.00 0.95
SR 596 0.09 0.28 0 1 734 0.08 0.27 0 1
GROWTH 596 0.20 1.57 0.91 33.13 734 0.21 1.60 0.57 36.31
SIZE (in millions) 596 1.14E þ 7 2.86E þ 7 8575 2.91E þ 7 734 1.05E þ 7 2.64E þ 7 8533 2.91E þ 4
LNSIZE 596 21.86 1.63 15.96 26.4 734 21.78 1.62 15.96 26.40
PPE 596 0.44 0.56 0.00 12.49 734 0.44 0.34 0.01 6.19
ROA 596 0.15 0.25 0.01 4.62 734 0.14 0.21 0.00 4.62
LEV 596 0.25 0.23 0 3.13 734 0.25 0.31 0 5.30
LIQ 596 0.15 0.15 0.00 1.41 734 0.14 0.14 0.00 1.19
LNAGE 596 2.53 0.83 0 4.22 734 2.55 0.83 0 4.22
AGE 596 16.37 10.15 1 68 734 16.56 9.91 1 68
Notes: Q: firm value as of 31 March; CASHETR: tax avoidance from cash taxes paid; GAAPETR: tax avoidance from tax expense; SR:
existence of sustainability report; GROWTH: company growth; SIZE/LNSIZE: company size; PPE: gross fixed assets; ROA: profitability;
LEV: leverage; LIQ: liquidity; and AGE/LNAGE: listing age

4. Results and discussion

From the sampling criteria, this study obtained 596 observations and 734 observations for
cash ETR and GAAP ETR, respectively. The descriptive statistics for the data are set out.
Table 2 shows the industry classification of samples used in this paper and every industries’
number of companies which make sustainability report.

Table 2 Descriptive statistics based on TRBC industry classification

CASH ETR regression GAAP ETR regression
n (%) n (%) n (%) n (%)

Consumer goods industry (NES) 94 15.77 120 16.35

0 86 91.49 112 93.33
1 8 8.51 8 6.67
Infrastructures, utilities and transportation (ES) 81 13.59 86 11.72
0 70 86.42 76 88.37
1 11 13.58 10 11.63
Trade, service, and investment (NES) 222 37.25 254 34.6
0 214 96.4 246 96.85
1 8 3.6 8 3.15
Basic industry and chemicals (ES) 55 9.23 81 11.04
0 52 94.55 77 95.06
1 3 5.45 4 4.94
Mining (ES) 34 5.7 63 8.58
0 23 67.65 50 79.37
1 11 32.35 13 20.63
Agriculture (ES) 34 5.7 43 5.86
0 27 79.41 34 79.07
1 7 20.59 9 20.93
Miscellaneous industry (NES) 76 12.75 87 11.85
0 72 94.74 83 95.4
1 4 5.26 4 4.6
Total 596 100 596 100 734 100 734 100
Notes: ES: environmentally sensitive industries (based on Rudyanto and Siregar [2018]); NES: non environmentally sensitive industries;
0: no sustainability report; and 1: has sustainability report

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The number of companies which make a sustainability report is still limited. From 596 and
734 observations, only 52 and 56 observations reveal the submission of a sustainability
report (8% on average). Of all types of industries, the industries that issued the most
sustainability reports were mining and agriculture. Both of these industries are industries
that are sensitive to the environment (Rudyanto and Siregar, 2018). Therefore, for additional
analysis, this research will distinguish between environmentally sensitive companies and
not-sensitive companies.
Before doing the hypothesis test, this paper completed a classical assumption test. It was
found that there is no problem with classical assumption. Pearson correlation analysis
(untabulated) shows that CASH ETR and GAAP ETR shows are highly correlated (0.4233
with error less than 5%). The results show that CASH ETR and GAAP ETR measure the
same latent variable, which is tax avoidance. The Pearson correlation analysis also shows
that GAAP ETR is negatively correlated with firm value, and CASH ETR is not correlated with
firm value. The existence of sustainability report is positively correlated with firm value. The
interaction between GAAP ETR and sustainability report is positively correlated with firm
value.
The regression test results in Table 3 show that tax avoidance is not associated with firm
value. It shows that shareholders do not respond to companies’ tax avoidance, as tax
avoidance is a common practice in Indonesia (Andri, 2017). Sustainability reports are
appreciated by shareholders, but sustainability reports can only increase shareholders’
perception on GAAP ETR. CASH ETR and GAAP ETR have different meanings. Where the
sustainability report from previous year positively responded to tax evasion from the tax
actually paid, the shareholders thought that the unpaid tax money was used for CSR (Inger
and Vansant, 2018). Where the sustainability report responded positively to tax evasion
from the tax expense, the shareholders considered it reasonable because the CSR expense
can reduce the firms’ tax burden that could increase corporate profits. The reduced GAAP
ETR is assumed to come from CSR expenses so that the sustainability report reduces the
negative assumption of tax avoidance (Government of the Republic of Indonesia, 2010).
This assumption is strengthened by the fact that profitability is positively associated with

Table 3 Regression test results

Qi;t ¼ b 0 þ b 1TAXi;t þ b 2 SRi;t þ b 3 TAX i;t SRi;t þ b 4SIZEi;t þ b 5 GROWTHi;t
þ b 6 PPEi;t þ b 7 ROAi;t þ b 8 LEVi;t þ b 9 AGEi;t þ b 10 LIQi;t þ ei;t
CASH ETR GAAP ETR
No moderation With moderation No moderation With moderation

Cons 0.771741 0.760571 2.716036 2.811023

CASH ETR 0.097801 0.085436 – –
GAAP ETR – – 0.59719 0.79125

SR 1.248122 1.278584 1.364114 2.083861
PPE 0.902002 0.903584 1.315899 1.323067
ROA 3.959199 3.961638 7.309091 7.335297
LEV 4.35647 4.35959 1.40757 1.40679
LNAGE 0.77841 0.77762 0.39351 0.39952
LNSIZE 0.257868 0.258088 0.052083 0.045278
GROWTH 0.40784 0.40858 1.07638 1.07681
SR CASH ETR – 0.101154 – –
SR GAAP ETR – – – 2.270195
Wald Chi2 48.92 49.19 30.46 33.04
Prob>Chi2 0.00000 0.00000 0.0066 0.0046
Adj R Square 0.1635 0.1637 0.2362 0.2366
Notes: Q: firm value as of 31 March; CASH ETR: tax avoidance from cash taxes paid; GAAP ETR: tax
avoidance from tax expense; SR: existence of sustainability report; GROWTH: company growth;
SIZE/LNSIZE : company size; PPE : gross fixed assets; ROA : profitability; LEV: leverage; LIQ:
liquidity, AGE/LNAGE : listing age;  ;  ;  = significant in 10, 5 and 1%, respectively

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 firm value only for the GAAP ETR equation. These results indicate that shareholders do not
believe that cash originating from tax avoidance is used for CSR activities. Research even
shows that excess cash can reduce sustainability spending (Boso et al., 2017).
As the Pearson correlation analysis reveals different result, this research does further
regression test by dividing the samples into two industry classifications, which are
environmentally sensitive industries and non-environmentally sensitive industries. Previous
research shows that shareholders’ response to corporate tax avoidance and CSR depends
on industry classification, especially between environmentally sensitive firms and non-
environmentally sensitive industries (Hall and Rieck, 1998; Reverte, 2012, 2016; Simone and
Stomberg, 2012). As the majority of the sample are environmentally sensitive firms, this
study distinguishes between environmentally sensitive firms and non-environmentally
sensitive firms. The results of this analysis are tabulated in Table 4. The results show that
shareholders appreciate tax avoidance undertaken by sensitive firms but do not appreciate
tax avoidance by non-sensitive firms. Therefore, sustainability reports can only mitigate the
negative perception on tax avoidance in non-sensitive firms. The association between tax
avoidance and firm value is only apparent in GAAP ETR. The results show that shareholders
pay more attention to tax expenses and their effect on earnings rather than cash tax paid.
Environmentally sensitive firms have good CSR activities and are close to stakeholders, so
tax avoidance is assumed to come from CSR expense. They also do not need sustainability
reports to improve public perception of tax avoidance. Conversely, non-sensitive firms have
not been able to demonstrate their sustainability activities without making a sustainability
report, so the sustainability report mitigates the negative relationship between tax
avoidance and firm value. The sensitivity test is conducted by changing the firm value date
to 31 December, and the results are the same (untabulated).
As the decision to make a sustainability report and the decision to avoid tax should be in the
same period (ex post), this study also tests using one year before the published year of the
sustainability report. For example, tax avoidance in 2014 is tested with sustainability report
published in 2015. It is assumed that the decision to make a sustainability report is done
one year before, together with tax reduction decisions. The results are unchanged, except
that the sustainability report is not able to mitigate the relationship of tax avoidance to the

Table 4 Regression test result based on sensitive and non-sensitive firms

CASH ETR GAAP ETR
ENV NONENV ENV NONENV

Cons 1.04291 0.54532 1.83686 1.132477

CASH ETR 0.08947 0.5642 – –
GAAP ETR – – 1.046397 2.52418
SR 0.16589 1.996066 0.46548 3.098477
PPE 0.34556 0.53026 0.144849 0.075711
ROA 2.20058 8.866206 0.479224 16.57862
LEV 1.72475 6.40804 2.07419 2.9095
LNAGE 0.42323 0.72205 0.29199 0.27951
LNSIZE 0.166735 0.225484 0.201428 0.02291
GROWTH 0.56416 0.12268 0.08365 0.046916
SR CASH ETR 0.160795 1.399712 – –
SR GAAP ETR – – 0.6788 4.158478
Wald Chi2 18.72 43.08 22.84 25.47
Prob > Chi2 0.0277 0 0.0066 0.0025
Adjusted R square 0.3674 0.2246 0.3185 0.3846
Notes: ENV: environmentally sensitive firms; NONENV: non-environmentally sensitive firms; Q: firm
value as of 31 March; CASH ETR : tax avoidance from cash taxes paid; GAAP ETR : tax avoidance
from tax expense; SR : existence of sustainability report; GROWTH: company growth, SIZE/LNSIZE:
company size; PPE: gross fixed assets; ROA: profitability; LEV: leverage; LIQ: liquidity; AGE/LNAGE:
listing age;  ;  ;  = significant in 10, 5 and 1%, respectively

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value of the company. This is because at the time of issuing financial statements,
shareholders did not know whether the company would make a sustainability report or not in
that year because it had not been issued. By using the previous year’s sustainability report
issued in that year, shareholders feel confident that the company is responsible and ethical
(ex ante) so that the effect of tax avoidance conducted that year on the firm value can be
mitigated (Table 5).

5. Conclusion
Motivated by Peraturan Otoritas Jasa Keuangan (POJK) regulation No. 51/POJK.03/2017
regarding the obligation to make sustainability reports for public firms and financial institutions
starting on 1 January 2019, this study aims to demonstrate that sustainability reports are useful
for companies to reduce shareholders’ negative perception of tax avoidance. The Indonesian
context is very much in accordance with this research because sustainability reports in
Indonesia are still voluntary, so the date for making mandatory sustainability reports is not
clear. This makes shareholders see whether the sustainability reports were made in that year
(ex ante) and can only decide how to respond to corporate tax avoidance.
The results show that tax avoidance has no association with firm value. Shareholders in
Indonesia do not respond to tax avoidance, both cash tax avoidance and GAAP tax
avoidance (tax expense avoidance). Because tax avoidance has no association with firm
value, sustainability reporting has no moderating role. This study also separates the samples
into two industry classification, which are environmentally sensitive industries and non-
environmentally sensitive industries. The results show that GAAP ETR has a positive
association with firm value in environmentally sensitive industries and GAAP ETR has a
negative association with firm value in non-environmentally sensitive industries. Thus, the role
of sustainability reports is apparent in non-environmentally sensitive industries only.
Environmentally sensitive industries do not need sustainability reports because tax avoidance
is perceived positively by shareholders. Non-environmentally sensitive industries need
sustainability reports to decrease shareholders’ negative perception of tax avoidance. These
results support agency theory and signalling theory. Voluntary sustainability reporting can
reduce information asymmetry about CSR information and signal to shareholders that tax
saving is used to finance CSR related activities.

Table 5 Regression test result for sustainability report one year before
CASH ETR GAAP ETR

Cons 1.0287 2.3366

CASH ETR 0.1773215 –
GAAP ETR – 0.53522
SR 1.547653 1.233185

PPE 0.8711712 1.303301
ROA 3.831969 7.226062
LEV 4.382949 1.42007

LNAGE 0.767315 0.37146
LNSIZE 0.2438703 0.06693
GROWTH 0.3861693 1.06123

SR CASHETR 0.5188352 –

SR GAAPETR – 0.91081
Wald Chi2 50.35 30.34
Prob > Chi2 0.00000 0.0108
Adjusted R square 0.1731 0.245
Notes: Q: firm value as of 31 March; CASH ETR : tax avoidance from cash taxes paid; GAAP ETR : tax
avoidance from tax expense; SR : existence of sustainability report; GROWTH : company growth;
SIZE/LNSIZE: company size; PPE : gross fixed assets; ROA: profitability; LEV: leverage; LIQ:
liquidity; AGE/LNAGE: listing age;  ;  ;  = significant in 10, 5 and 1%

j SOCIAL RESPONSIBILITY JOURNAL j

 The results of this study may have practical implications. As shareholders pay more
attention to GAAP tax avoidance, companies need to reduce aggressive tax planning which
reduces tax expenses. If tax expenses reduce because of CSR, companies in non-sensitive
industries must produce sustainability reports to inform shareholders that the reduced tax
expenses are a result of CSR activities. Sustainability reports can reduce shareholders’
negative perception of tax avoidance. As sustainability reporting is soon to be mandatory,
the role of mandatory sustainability reporting in mitigating shareholder’s negative
perception on tax avoidance is unknown. Therefore, non-sensitive firms should find a way to
show their concern for sustainability issues without depending on the mere existence of a
sustainability report. For example, firms can increase the quality of sustainability reporting
by disclosing more information on CSR activities (Ching et al., 2017; Rudyanto and Siregar,
2018) or receiving assurance for their sustainability reports (Kolk and Perego, 2010; Alon
and Vidovic, 2015). Future research is needed to analyse the role of sustainability report
quality on the negative association between tax avoidance and firm value.
This research is not without limitations. The decision to make a sustainability report is an
endogenous variable so that future research can identify instrumental variables to overcome
this endogeneity. This research has used the previous year’s sustainability reports, but this
is not enough to overcome the endogeneity problem. This research is also limited only to
profitable firms, so it cannot be generalised to companies whose profit before tax is
negative. In addition, to determine shareholder perceptions, behavioural research by
interview or questionnaire may enrich the results of this study.
Nonetheless, this research contributes to taxation and CSR research. This research
shows the usefulness of sustainability reporting in mitigating the negative perception of
tax avoidance in non-environmentally sensitive firms. The sustainability reports examined
here were produced voluntarily. The impact of mandatory sustainability reporting is still
unknown; this question can only be answered once the regulation has come into force.

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About the authors

Astrid Rudyanto is a Lecturer at the Trisakti School of Management. She got her bachelor’s
degree in accounting from Trisakti School of Management in 2013 with a predicate of
summa cum-laude and master’s degree in accounting from University of Indonesia in 2016
as the second-best graduate. She is taking her PhD at University of Indonesia. Her research
is focussed on corporate social responsibility, sustainability report and corporate
governance. She has presented at several national and international symposiums in
2016–2017. Her works are published in the International Journal of Ethics, GATR Journal
Accounting and Finance Review and other accredited national journals. Astrid Rudyanto is
the corresponding author and can be contacted at: [email protected]

Kashan Pirzada is an Assistant Professor of financial accounting at the Tunku Puteri Intan
Safinaz School of Accountancy, Universiti Utara Malaysia. He has joined UUM after 12
years of research and teaching at the University of Malaya and Institute of Business
Management. He has produced a number of research papers out of a funded project and
has publications in international journals including the Elsevier Journal of Social and
Behavioural Sciences, British Accounting and Finance, Polish Journal of Management
Studies, Pertanika Journal of Social Sciences and Humanities, Entrepreneurship and
Sustainability Issues and International Journal of Economics and Management. He has
been a lead Guest Editor of the special issue for Elsevier Procedia of Social and Behavioural
Sciences, Journal of Social Sciences and Humanities and International Journal of
Economics and Management. He continues researching on financial accounting issues in
both advanced capitalist countries and emerging/less-developed countries. He is a regular
speaker at research and professional forums, including the workshops and continues PhD
supervision at UUM.

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