Differences in Tax Avoidance According to Corporate Sustainability with a Focus on Delisted Firms

Abstract

This study analyzed whether the level of tax avoidance of delisted firms differs from that of non-delisted firms. A decrease in the corporate sustainability of listed firms eventually leads to delisting. If the financial risk of firms increases, the incentive to avoid taxes will also increase. In this case, an extremely aggressive tax strategy might negatively impact sustainability and prove to be non-continuous. This induces the possibility of delisting. Accordingly, this study analyzed whether delisted firms perform more tax avoidance than non-delisted companies from the perspective of corporate sustainability. The results of this study are as follows. The results of analyzing whether the cash effective tax rate and effective tax rate, which are proxies of tax avoidance, are different reveal that the cash effective tax rate and effective tax rate of the delisted companies are significantly low. This suggests that delisted companies are receiving more incentives to avoid taxes. Additionally, this study also analyzed whether there is a difference in tax risk between delisted and non-delisted companies. The results reveal that the delisted companies have a significantly higher tax risk. This study contributes to the literature on the tax strategy of delisted companies. It also contributes to enhancing the understanding of corporate sustainability.

1. Introduction

The Korea Exchange (KRX) manages the main stock market (KOSPI), the Korean Securities Dealers Automated Quotations (KOSDAQ), and the Korea New Exchange (KONEX). Corporate stocks traded on these markets are called listed stocks and are traded based on Korea’s Capital Market Act. Listed firms must comply with each market’s disclosure regulations. However, many firms maintain their listing for reasons such as ease of raising capital. There were approximately 2400 listed firms in Korea as of January 2022, a considerable increase from the 1800 listed firms in 2010.

Most newly listed firms survive and remain stably listed: the average age is 32.9 years for firms listed on KOSPI and 16.7 years for those on KOSDAQ. Nevertheless, many listed firms also disappear before reaching the average age [1]. This indicates that the sustainability of newly listed firms is at risk, with many firms delisting shortly after their listing. Studies have shown that many firms delist within five to eight years of their listing [1,2,3]. It is vital to analyze the determinants and warning signs of a potential delisting to ensure stable growth of newly listed firms and improve their sustainability. However, there is scant research on the topic. There are various regulations related to delisting in Korea. The existence of regulations related to delisting can serve to remind companies of the risk of delisting.

Corporate sustainability decreases as corporate risk increases, and a firm’s financial risk can act as an incentive for tax avoidance. In this case, an increase in tax risk may induce negative effects on sustainability. This decreases the sustainability of listed firms and can lead to delisting. In other words, delisting can serve as evidence for the questionable sustainability of a company. This study analyzed whether delisted Korean firms perform more tax avoidance than non-delisted companies from the perspective of corporate sustainability. Since Korea has a higher corporate tax rate than other countries, it is expected that Korean firms have a strong motivation for tax avoidance. Therefore, this study was intended to be conducted on delisted companies in Korea.

The sustainability of a company has a negative relationship with the possibility of delisting. The determinants of delisting are diverse and vary with the type of delisting (voluntary or involuntary). However, the main factor influencing the delisting of all firms is their financial situation. Prior studies have analyzed the determinants of delisting and report that delisted firms exhibit lower financial stability and profitability and experience financial difficulties [4,5,6]. This implies that the higher the financial risk, the higher the possibility of delisting. These financial difficulties predominantly result from poor management decisions.

Investment decisions are among the major managerial decisions. Inefficient investment behavior (over- or underinvestment) occurs when a firm does not invest at an appropriate level. Investment decisions are sometimes based on managers’ personal qualities (e.g., overconfidence). However, they can also be determined by factors of the firm’s operating environment, such as governance, the availability of capital, and information asymmetry. If corporate governance is good or information asymmetry between the management and investors is low, then management is less likely to make inefficient investment decisions based on private incentives [7]. Inefficient investments reduce future business performance [8,9].

Financial constraints caused by inefficient investments can directly impact a firm’s sustainability. Prior studies report that the higher the overinvestment of firms newly listed on KOSDAQ, the more likely they are to delist within a short period [10]. Specifically, under- and overinvestment causes a decrease in financial indicators (profitability, growth rate, etc.) and firm’s future earnings potential, thus increasing the firm’s financial constraints and information asymmetry. If managerial overinvestment persists for a long time, then the firm becomes more likely to delist.

Financial constraints refer to instances where there are differences in access to internal and external funding. Firms experiencing financial constraints find it more difficult to raise external funds and need to explore various solutions to escape these constraints. A common strategy is to secure cash flow through tax avoidance. Management may use internally raised funds through tax avoidance to invest in business activities, which makes firms under financial constraints more likely to avoid taxes [11,12].

Firms are more likely to adopt a tax avoidance strategy when they lack cash holdings or are under financial constraints. This increase in tax avoidance behavior is a factor that increases firm risk. Tax avoidance can also increase uncertainty regarding the firm’s future tax expenditure [13], which can impact future cash flow. If external stakeholders perceive tax avoidance as a result of management’s private behavior, then agency problems occur and the firm risk increases [14]. Tax avoidance using tax havens, in particular, can damage a firm’s reputation, lead to litigation or fines in future [15], and increase potential litigation risk. Tax avoidance also impacts the information risk of firms: it decreases transparency in financial reporting and, consequently, information asymmetry increases. If the increase in risk exceeds the benefits of tax avoidance, then the firm’s overall business risk increases, thereby negatively affecting the firm’s sustainability. Dhawan et al. [16] verified the impact of tax avoidance on firm bankruptcy risk and reported that as tax avoidance increases, bankruptcy risk increases significantly. A very aggressive tax strategy might not be sustainable in the long-term as it might introduce risks.

Listed firms accumulate risk and when their risk exposure exceeds a threshold level, their sustainability falls and they are ultimately delisted. Delisted firms are mostly already under financial constraints before delisting, which can act as an incentive to avoid taxes. Thus, management is more likely to use cash holdings obtained through tax avoidance to escape from a crisis in the short term rather than making investments to increase long-term value [17]. If this process repeats, then delisted firms are expected to engage in more tax avoidance behavior than non-delisted firms. This study focused on delisted firms to analyze the influence of corporate sustainability on firms’ tax strategy.

2. Prior Research and Hypothesis

In Korea, delisting is categorized into voluntary and involuntary delisting. A voluntary delisting occurs when a firm voluntarily decides to delist. A voluntary delisting is usually associated with agency problems. Weir et al. [18] reported that if a stock is undervalued, then management has to decide whether to maintain the firm’s listed status or to delist. Bharath and Dittmar [19] reported that if information asymmetry is high, then the manager has incentive to delist voluntarily to reduce agency costs. Pour and Lasfer [6] also reported that voluntarily delisting is more common in firms that face high debt ratios, difficulties in raising capital, and low profitability and growth potential.

Involuntary delisting differs from voluntary delisting in that the securities exchange decides to delist a firm because it has failed to meet certain requirements. Mandatory delisting can be categorized into delisting based on formal requirements and on real evaluation standards. Delisting based on formal requirements occurs when firms fail to meet the legal criteria for listing. Firms at risk will consequently seek to avoid delisting based on requirements by increasing corporate earnings management, often reducing accounting transparency. Sohn and Yum [20] analyzed the relationship between delisting risk and earnings management and found that the upward earnings management increases as delisting risk grows. Park et al. [21] analyzed the financial supervisory cases of firms with a high risk of being delisted. They found that, to avoid delisting, firms create fictitious sales or engage in upward earnings management and often understate debt to avoid equity impairment.

The earnings management behaviors of insolvent firms trying to avoid delisting when they have failed to meet the formal requirements of listing, which can adversely impact the overall capital market. Thus, in 2009, Korea’s securities exchanges implemented an involuntary delisting system by real evaluation standards. This system is meant to eliminate the improper behavior of insolvent listed firms and protect participants in the capital market. Lee and Park [22] empirically analyzed the usefulness of an involuntary delisting system based on real evaluation standards. They found that firms delisted under the involuntary delisting system by real evaluation standards had experienced substantial financial difficulties before their delisting and had average excess returns of approximately −73%. This signifies that investors incur substantial investment losses due to delisting. They also reported a significant negative relationship between the delisting likelihood and changes in majority shareholder ownership. As the likelihood of delisting increases, there occurs a significant decrease in majority shareholding over the preceding three years.

Corporate sustainability decreases as the likelihood of delisting increases. Some newly listed firms remain listed for a long period before delisting, while others delist within a short period. Several studies have evaluated the likelihood and determinants of delisting for newly listed firms. Jun [2] analyzed the likelihood of delisting within five years that had been listed via an initial public offering (IPO). This analysis showed that a newly listed firm is less likely to delist when it has a large equity capital, low debt ratio, and high share of related parties. Kim and Park [3] analyzed the relationship between the period for which a firm remains listed and its risk of delisting. They found that the likelihood of delisting decreases with the period for which the firm remains listed after its IPO. Li et al. [23] reported that when a firm has an IPO, it engages in earnings management. This aggressive earnings management negatively impacts future business performance and increases the likelihood of an IPO failure, thus increasing the likelihood of delisting. Choi [1] applied a survival analysis technique to the KONEX to analyze the period for which firms remain listed and found that KONEX firms survived for four to five years on average. Lastly, Choi et al. [10] analyzed the influence of overinvestment by newly listed firms on KOSDAQ on their delisting. They found that the likelihood of a newly listed firm delisting within eight years increases with higher levels of overinvestment. Together, these findings indicate that for delisted firms, warning signs appear before the delisting and the likelihood of delisting increases over time.

Signs related to a potential delisting can provide valuable information about a firm’s sustainability among the capital market participants. In particular, regulations related to delisting, such as the voluntary delisting, delisting based on formal requirements, and delisting based on real evaluation standards are operated in the Korean stock market. The existence of regulations related to delisting can serve to remind companies of the risk of delisting. This is because companies that judge that the risk of delisting is high perform management decision making in response, and this behavior can be observed as a precursor to delisting. In addition, since the Korean capital market has a high proportion of individual investors, social losses may be significantly large if delisting occurs. Therefore, it is important to identify the prior signs of delisting, and many studies had been conducted on delisting in Korea. Related prior studies mainly focused on financial characteristics of delisted firms. Bae and Jung [24] compared financial ratios of delisted KOSDAQ firms to non-delisted firms. They reported that firms’ current asset ratio, return on sales, total capital turnover, and fixed asset turnover have a significant impact on their potential delisting. Jun et al. [4] analyzed changes in the profitability of delisted firms. They found that the ratio of operating profit to total assets and that of operating profit to net sales deteriorated before the firms’ delisting. Park et al. [25] reported that the likelihood of delisting increases when there are weaknesses in a firm’s internal accounting control system. Kim [26] reported that the closer firms are to their delisting, the smaller their majority shareholder ownership. Bae [5] reported that variables, such as financial stability, profitability, and corporate governance, could serve as major factors to predict delisting risk using artificial intelligence (AI) techniques. These findings suggest that, as profitability and financial conditions deteriorate and poor governance increases, information asymmetry and delisting risk increase. Thus, delisted firms have less financial stability and profitability and experience more financial constraints.

Financial constraints refer to cases where there are differences in access to internal and external funding. Therefore, a firm has financial constraints when external funding costs are relatively high and access to external funding is low [27,28]. Cost of external funding rises as financial constraints increase, increasing the preference for internal funds. Management also depends more on internal funds when making decisions as financial constraints grow [28]. Hence, if a firm has financial constraints, it has difficulty raising funds in the capital market and faces higher costs. Consequently, the marginal value of internal cash holdings rises as financial constraints increase. Therefore, the greater difficulty a firm has in raising external funds (the more it lacks internal funds), the more likely it is to lose beneficial investment opportunities with a positive net present value [29]. Campello and Chen [30] reported that firms that experience significant financial constraints delay or cancel their investment plans. This loss of investment opportunities or mismatch in investment timing ultimately reduces business performance in the future [8,9].

Financial constraints caused by inefficient investments directly impact a firm’s sustainability. An earlier study found that the higher the level of overinvestment of firms newly listed on the KOSDAQ, the more likely they are to delist within a short period [10]. In other words, under- and overinvestment causes financial indicators (profitability, growth rate, etc.) to decrease their estimations for a firm, thus exacerbating its financial difficulties and increasing information asymmetry. If this phenomenon persists, the likelihood of a firm’s delisting increases.

Firms under financial constraints will explore various solutions to escape it. One common method is to secure cash flow through tax avoidance. Tax avoidance refers to the action of reducing the amount of tax paid in a way that does not violate the provisions of the tax law and is the opposite concept to tax compliance. Dyreng et al. [31] defined tax avoidance as the degree to which explicit tax decreases and reported that the result of tax reduction occurs from tax avoidance behavior. Cash flows generated by tax avoidance are referred to as internal funds. When a firm is under financial constraints, it values the marginal value of internal cash holdings higher than cash flows from external funding [32]. Thus, management has an incentive to use internally obtained funds through tax avoidance to conduct business activities.

Ayers et al. [11] and Edward et al. [12] reported that tax avoidance increases when a firm is under financial constraints. Specifically, Ayers et al. [11] reported that a firm under financial constraints could increase its cash holdings through tax avoidance, which it can subsequently utilize for more profitable investments to enhance corporate value. Edward et al. [12] reported that the higher a firm’s financial constraints, the lower the cash effective tax rate. Chen and Lai [33] analyzed the relationship between financial constraints and aggressive tax avoidance. They found that firms under higher financial constraints avoid tax more aggressively and use the cash flows generated by it for investment.

Raising external capital is closely associated with (aggressive) tax avoidance. Newly listed firms attempt to grow aggressively in their early stages and are extremely likely to resort to tax avoidance behaviors. This is because the higher a firm’s growth potential, the higher its probability of survival, and the greater the likelihood to get private benefits for the manager. Hence, newly listed firms can attempt to secure internal funds to ensure their survival through tax avoidance [34]. Already listed firms may also have incentives to avoid taxes compared to external funding. Lee and Jung [35] found that firms that conduct seasoned equity offerings carry out more tax avoidance. They reported that firms obtain additional funds by issuing equity even if they use internal funds through tax avoidance.

According to the many studies, these findings indicate that firms are highly likely to avoid taxes when they desire external funds or lack cash holdings and are under financial constraints. This increase in tax avoidance behavior increases tax and bankruptcy risk. Tax risk originates from the uncertainty about a firm’s future tax expenditure [13]. Tax uncertainty increases if cash outflows from corporate tax payments are more likely to fluctuate significantly in the future due to tax avoidance in the current period, in which case management has a precautionary motive to hold cash by controlling internal funds [36].

While tax avoidance could directly create tax risk, it can also increase firm risk by influencing the firm’s information environment. Balakrishnan et al. [37] reported that firms that aggressively avoid taxes have lower financial transparency and higher firm information asymmetry. Hope et al. [38] also reported that information opacity and asymmetry increase as tax avoidance increases. In particular, if a firm’s use of a tax haven to avoid taxes is discovered, the firm’s reputation will be damaged and it may face lawsuits and fines in future [15].

Tax avoidance also increases the risk by agency problems. Desai and Dharmapala [14] have reported that firms manage earnings and tax avoidance together to maximize private utility. Tax avoidance brings about agency costs, and the firm risk grows if the benefits from tax avoidance do not exceed agency costs [16]. Dhawan et al. [16] verified the impact of tax avoidance on firm bankruptcy risk and found that the bankruptcy risk increases as tax avoidance increases.

The risk factors presented in the above studies directly impact corporate sustainability. The greater the severity of a firm’s agency problems [14], the higher its financial risk [11,12], or the higher its information risk [36], the lower its corporate sustainability. For listed firms in particular, an increase in risk can lead to a delisting [10,23]. Delisted firms experience lower levels of profitability and financial difficulties before delisting [15]. Therefore, these firms may be incentivized to generate internal cash through tax avoidance. This study analyzed the influence of corporate sustainability on tax avoidance. Thus, the hypothesis developed is as follows.

Hypothesis 1.

A delisted firm conducts more tax avoidance than a non-delisted firm.

3. Methodology

3.1. Samples

This study examined whether delisted firms exhibit more tax avoidance behavior than non-delisted firms in the decade before their delisting. We configured a delisted sample group and a non-delisted control group. The firms in the delisted sample were defined as firms delisted from 2011 to 2020. For the control group, we selected non-delisted firms that were in the same market and industry as the firms in the delisted sample, had ±10% asset size, and a minimum difference in sales. The financial data for all the samples selected through this process were extracted from the Kis-Value database. The data that were missing in the time-series were excluded. Outlier samples were also removed, resulting in a final sample of 1315 firm years. The distribution of the sample by year is as follows (

Table 1. Distribution of the sample by year.

Year	No. of Total Samples	Ratio	No. of Delisted Sample	No. of Non-Delisted Sample
2011	214	14.94%	105	109
2012	185	12.92%	88	97
2013	175	12.22%	82	93
2014	182	12.71%	80	102
2015	161	11.24%	69	92
2016	115	8.03%	54	61
2017	111	7.75%	49	62
2018	91	6.35%	32	59
2019	57	3.98%	24	33
2020	24	1.68%	10	14
Total	1315	100.00%	593	722

).

3.2. Research Model

This study sought to analyze the influence of corporate sustainability on tax avoidance. To test Hypothesis 1—delisted firms exhibit more tax avoidance behavior than non-delisted firms—we developed the following model:

$$\begin{array}{c}\mathrm{Tax} \mathrm{Avoidance}={\mathsf{\beta }}_0+{\mathsf{\beta }}_1\mathrm{DelistDummy}+{\mathsf{\beta }}_2\mathrm{Size}+{\mathsf{\beta }}_3\mathrm{Leverage}\\ +{\mathsf{\beta }}_4\mathrm{CurrRatio}+{\mathsf{\beta }}_5\mathrm{MTB}+{\mathsf{\beta }}_6\mathrm{lnAGE}+{\mathsf{\beta }}_7\mathrm{ROA}\\ +{\mathsf{\beta }}_8\mathrm{LossDummy}+{\mathsf{\beta }}_9\mathrm{MKT}\\ +\mathrm{YearDummy}+\mathrm{IndDummy}+ \mathsf{\epsilon }\end{array}$$

(1)

Tax Avoidance	:	Tax avoidance measured by CashETR, GAAPETR
CashETR	:	Cash tax paid divided by before-tax book income
GAAPETR	:	Total income tax expenses divided by before-tax book income
DelistDummy	:	Dummy variable with a value of 1 if it was a delisted firm, otherwise 0
Size	:	Natural logarithm of total assets
Leverage	:	Total liabilities divided by total assets
CurrRatio	:	Current assets divided by underlying assets
MTB	:	Common stock divided by total equity
lnAGE	:	Natural logarithm of current year minus the year of establishment
ROA	:	Net income divided by total assets
Lossdummy	:	Dummy variable that is 1 if loss occurred in the previous year, otherwise 0
MTK	:	Market dummy
IndDummy	:	Industry dummies
YearDummy	:	Year dummies

The model’s dependent variables include the long-run cash effective tax rate and the long-run effective tax rate, which are measures of tax avoidance. The most common proxy for tax avoidance is the effective tax rate. Tax avoidance appears due to the actions taken by a firm’s efforts to reduce taxes and it is observed that the effective tax rate is low due to lower corporate tax payments compared to profits. Dyreng et al. [31] defined tax avoidance as the ability to pay less tax than the reported pre-tax profit. In particular, Dyreng et al. [31] reported that the long-term effective tax rate is more useful than the short-term effective tax rate as measure of tax avoidance. Prior studies generally use the long-run effective tax rate to measure tax avoidance [13,31]. The cash effective tax rate is the sum of the firm’s corporate tax from years t − 4 to t divided by the sum of the net income before tax expenses. The effective tax rate is the sum of the firm’s corporate tax expenses from years t − 4 to t divided by the sum of the net income before tax expenses. When the management avoids taxes, the cash effective tax rate and effective tax rate fall; therefore, previous studies used the two rates to measure tax avoidance [31]. This study also used the effective tax rate to measure tax avoidance.

In model (1), the main independent variable is the DelistDummy variable, which has a value of 1 if it corresponds to the delisting firms and a value of 0 if otherwise. If delisted firms avoid taxes more frequently than non-delisted firms, then the coefficient of the DelistDummy variable is expected to have a significant negative value.

Previous studies have shown that corporate characteristics are related to tax avoidance [39,40]. Financial conditions can have a significant impact on tax avoidance. Therefore, we controlled for firm size, leverage, current asset ratio, return on assets, and loss dummy. Growth potential can also affect tax avoidance. Thus, we controlled for the market to book ratio and age of firms. The above control variables are included in model (1). Size is the natural logarithm of total assets, and Leverage is the total liabilities divided by the total assets. CurrRatio is current assets divided by underlying assets, MTB is the year-end market value of common stock divided by total equity, and lnAGE is the natural logarithm of the firm age. Furthermore, ROA is the current net income divided by the total assets and LossDummy is a dummy variable that is 1 if there was loss in the previous year and 0 otherwise. The market dummy variable (MKT), year dummy variable (YearDummy), and industry dummy variable (IndDummy) are also included in the model because the level of tax avoidance may vary by year and according to the firm’s market and industry.

4. Results

4.1. Descriptive Statistics

Table 2. Descriptive statistics.

Variable	Full Samples		Delisted Firms		Not Delisted Firms
	Mean (Median)	Max (Min)	Mean (Median)	Max (Min)	Mean (Median)	Max (Min)
CashETR	0.145 (0.163)	18.736 (−12.928)	0.097 (0.134)	3.148 (−3.561)	0.184 (0.179)	18.736 (−12.928)
GAAPETR	0.140 (0.167)	18.736 (−12.928)	0.086 (0.134)	3.148 (−3.682)	0.183 (0.180)	18.736 (−12.928)
StdCashETR	1.624 (0.060)	507.919 (0.001)	3.124 (0.060)	507.919 (0.001)	0.391 (0.060)	44.889 (0.002)
StdGAAPETR	1.602 (0.050)	444.879 (0.001)	2.984 (0.068)	444.879 (0.001)	0.467 (0.043)	65.342 (0.002)
Size	25.825 (25.668)	30.888 (22.504)	25.895 (25.734)	30.888 (22.504)	25.767 (25.608)	29.165 (23.459)
Leverage	0.443 (0.424)	2.426 (0.008)	0.490 (0.477)	2.426 (0.027)	0.403 (0.378)	1.558 (0.008)
CurrRatio	0.493 (0.463)	2.484 (0.001)	0.484 (0.447)	2.429 (0.009)	0.500 (0.470)	2.484 (0.001)
MTB	1.685 (1.019)	326.258 (−17.661)	1.927 (1.018)	326.258 (−17.661)	1.486 (1.020)	41.581 (−0.439)
lnAGE	3.184 (3.135)	4.779 (1.609)	3.199 (3.178)	4.330 (1.609)	3.172 (3.135)	4.779 (2.079)
ROA	−0.010 (0.017)	2.054 (−1.177)	−0.061 (−0.002)	0.443 (−1.177)	0.031 (0.031)	2.054 (−0.430)
Lossdummy	0.317 (0.000)	1.000 (0.000)	0.450 (0.000)	1.000 (0.000)	0.207 (0.000)	1.000 (0.000)
MKT	1.682 (2.000)	2.000 (1.000)	1.659 (2.000)	2.000 (1.000)	1.700 (2.000)	2.000 (1.000)
Obs.	1315		593		722

Detailed definition of variables is as follows. CashETR = cash tax paid divided by before-tax book income; GAAPETR = total income tax expense divided by before-tax book income; stdCashETR = standard deviation of CashETR; stdGAAPETR = standard deviation of GAAPETR; DelistDummy = dummy variable with a value of 1 if it was delisted, otherwise 0; Size = natural logarithm of total assets; Leverage = total liabilities divided by total assets; CurrRatio = current assets divided by underlying assets; MTB = common stock divided by total equity; lnAGE = natural logarithm of current year minus the year of establishment; ROA = net income divided by total assets; Lossdummy = dummy variable that is 1 if loss occurred in the previous year, otherwise 0; MKT = 1 if listed in KOSPI, otherwise 2.

presents the descriptive statistics of the variables used in this study. The mean (median) of CashETR was 0.145 (0.163) and that of GAAPETR was 0.140 (0.167). Additionally, the mean (median) of stdCashETR was 1.624 (0.060) and that of stdGAAPETR was 1.602 (0.050). Overall, the tax avoidance measurement variables did not have similar mean and median values, indicating that the standard deviation of the variables was large.

Regarding the control variables, the mean (median) of Size was 25.825 (25.668) and that of Leverage was 0.443 (0.424). The mean (median) values of CurrRatio, MTB, lnAGE, ROA, and LossDummy were 0.493 (0.463), 1.685 (1.019), 3.184 (3.135), −0.010 (0.017), and 0.317 (0.000), respectively. The descriptive statistics presented above describe the entire sample. However, Table 2 includes the descriptive statistics divided into subsamples. This is represented in

Table 3. Results of difference test.

Variable	(1) Delisted	(2) Not Delisted	Difference (1)−(2)	t-Stat [z-Stat]
	Mean (Median)	Mean (Median)
CashETR	0.097 (0.134)	0.184 (0.179)	−0.087 (−0.045)	−1.72 * [−4.44 ***]
GAAPETR	0.086 (0.134)	0.183 (0.180)	−0.097 (−0.046)	−1.82 * [−4.11 ***]
StdCashETR	3.124 (0.060)	0.391 (0.060)	2.733 (0.000)	2.05 ** [−0.29]
StdGAAPETR	2.984 (0.068)	0.467 (0.043)	2.517 (0.025)	2.00 ** [3.88 ***]
Size	25.895 (25.734)	25.767 (25.608)	0.128 (0.126)	2.08 ** [0.87]
Leverage	0.490 (0.477)	0.403 (0.378)	0.087 (0.099)	6.18 *** [6.35 ***]
CurrRatio	0.484 (0.447)	0.500 (0.470)	−0.016 (−0.023)	−1.06 [−1.91 **]
MTB	1.927 (1.018)	1.486 (1.020)	0.441 (−0.002)	0.86 [1.61]
lnAGE	3.199 (3.178)	3.172 (3.135)	0.026 (0.043)	0.87 [1.57]
ROA	−0.061 (−0.002)	0.031 (0.031)	−0.092 (−0.033)	−10.40 *** [−10.40 ***]
Lossdummy	0.450 (0.000)	0.207 (0.000)	0.243 (0.000)	9.73 *** [9.39 ***]
MKT	1.659 (2.000)	1.700 (2.000)	−0.040 (0.000)	−1.61 [−1.60]
Obs.	593	722

*, **, and *** denote the significance at 10%, 5%, and 1% levels, respectively. t stat is test statistic of difference analysis for the mean between the two groups and [z stat] is a test statistic for the Wilcoxon’s signed-rank test. Detailed definition of variables is as follows. CashETR = cash tax paid divided by before-tax book income; GAAPETR = total income tax expense divided by before-tax book income; stdCashETR = standard deviation of CashETR; stdGAAPETR = standard deviation of GAAPETR; DelistDummy = dummy variable with a value of 1 if it was delisted firms, otherwise 0; Size = natural logarithm of total assets; Leverage = total liabilities divided by total assets; CurrRatio = current assets divided by underlying assets; MTB = common stock divided by total equity; lnAGE = natural logarithm of current year minus the year of establishment; ROA = net income divided by total assets; Lossdummy = dummy variable that is 1 if loss occurred in the previous year, otherwise 0; MKT = 1 if listed in KOSPI, otherwise 2.

. Table 3 shows the statistics and the results of the difference analysis.

Table 3 shows the results of the analysis of the difference between the mean and median values of variables measured based on sample data and control data. Regarding CashETR, the mean (median) of the delisted samples was 0.097 (0.134) and that of the non-delisted samples was 0.184 (0.179). This indicated that the delisted samples had a statistically significantly lower cash effective tax rate. Regarding GAAPETR, the mean (median) of the delisted samples was 0.086 (0.134) and that of the non-delisted samples was 0.183 (0.180). Therefore, the difference in mean (median) was statistically significant. Thus, the results of the analysis of the differences between cash effective tax rate and effective tax rate suggest that delisted firms avoid taxes more frequently than non-delisted firms. Regarding the results of the analysis of the differences in stdCashETR and stdGAAPETR, the mean (median) of stdCashETR and stdGAAPETR for the delisted samples was 3.124 (0.060) and 2.984 (0.068), respectively, and that of non-delisted samples was 0.391 (0.060) and 0.467 (0.043), respectively. Moreover, the difference between these mean (median) values were statistically significant. This signifies that delisted firms have a more volatile cash effective tax rate and effective tax rate.

Regarding the results of the difference analysis of the control variables, Leverage, CurrRatio, ROA, and LossDummy all showed significant differences in their mean (median) values. This indicated that the delisted samples have a statistically significant higher debt ratio, lower current ratio, and lower profitability than the non-delisted samples. Therefore, we expect that delisted firms have an incentive with respect to tax avoidance.

Table 4. Correlation matrix.

Variable	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)
(1) CashETR	1.00
(2) GAAPETR	0.96	1.00
(3) StdCashETR	0.01	0.01	1.00
(4) StdGAAPETR	0.01	0.01	0.99	1.00
(5) Size	0.04	0.04	−0.06	−0.06	1.00
(6) Leverage	0.03	0.03	−0.01	−0.01	0.13	1.00
(7) CurrRatio	0.02	0.03	0.02	0.02	−0.13	0.15	1.00
(8) MTB	−0.01	−0.01	−0.01	−0.01	−0.04	0.03	0.01	1.00
(9) lnAGE	0.06	0.06	0.05	0.04	0.33	−0.07	−0.13	−0.01	1.00
(10) ROA	0.05	0.05	0.01	0.01	0.16	−0.26	0.30	−0.08	0.02	1.00
(11) Lossdummy	−0.01	−0.01	0.03	0.03	−0.12	0.30	−0.19	−0.01	−0.03	−0.45	1.00
(12) MKT	−0.02	−0.03	0.04	0.04	−0.59	−0.03	0.17	0.04	−0.49	−0.05	0.04	1.00

Bold denotes the significance at 1% level. Detailed definition of variables is as follows. CashETR = cash tax paid divided by before-tax book income; GAAPETR = total income tax expense divided by before-tax book income; stdCashETR = standard deviation of CashETR; stdGAAPETR = standard deviation of GAAPETR; DelistDummy = dummy variable with a value of 1 if it was delisted firms, otherwise 0; Size = natural logarithm of total assets; Leverage = total liabilities divided by total assets; CurrRatio = current assets divided by underlying assets; MTB = common stock divided by total equity; lnAGE = natural logarithm of current year minus the year of establishment; ROA = net income divided by total assets; Lossdummy = dummy variable that is 1 if loss occurred in the previous year, otherwise 0; MKT = 1 if listed in KOSPI, otherwise 2.

presents the Pearson correlation coefficients of the variables used in this study. According to the results of the correlation coefficient analysis, there is a high correlation coefficient between the dependent variables. However, as these variables are alternately used in the regression analysis, we expect no bias in the results of the empirical analysis. Additionally, as the correlations between some control variables were significantly high, the variance inflation factor (VIF) was estimated in the multivariate analysis. However, multicollinearity problems were not expected.

4.2. Regression Results

This section presents the results of the analysis on whether the delisted firms show higher levels of tax avoidance than non-delisted firms in

Table 5. Results of analysis.

Variable	CashETR				GAAPETR
	Coeff.	t-Stat		VIF	Coeff.	t-Stat		VIF
Intercept	−0.551	−0.52		0.00	−0.445	−0.43		0.00
DelistDummy	−0.107	−1.81	*	1.22	−0.124	−2.13	**	1.22
Size	0.006	0.19		2.40	0.006	0.16		2.40
Leverage	0.216	1.62		1.63	0.227	1.74	*	1.63
CurrRatio	0.149	1.19		1.54	0.159	1.29		1.54
MTB	−0.002	−0.80		1.03	−0.002	−0.79		1.03
lnAGE	0.119	1.91	*	1.74	0.103	1.70	*	1.74
ROA	0.255	1.25		1.63	0.277	1.38		1.63
Lossdummy	0.084	1.18		1.54	0.106	1.52		1.54
MKT	included				included
YearDummy	Included				included
IndDummy	included				included
F-value	1.72				1.52
Adj. R²	0.0246				0.0178
Obs.	1315				1315

* and ** denote the significance at 10% and 5% levels, respectively. Detailed definition of variables is as follows. CashETR = cash tax paid divided by before-tax book income; GAAPETR = total income tax expense divided by before-tax book income; DelistDummy = dummy variable with a value of 1 if it was delisted firms, otherwise 0; Size = natural logarithm of total assets; Leverage = total liabilities divided by total assets; CurrRatio = current assets divided by underlying assets; MTB = common stock divided by total equity; lnAGE = natural logarithm of current year minus the year of establishment; ROA = net income divided by total assets; Lossdummy = dummy variable that is 1 if loss occurred in the previous year, otherwise 0; MKT = 1 if listed in KOSPI, otherwise 2.

.

Table 5 summarizes the results of the empirical analysis of model (1). CashETR and GAAPETR are the dependent variables. When the dependent variable was CashETR, the coefficient value of the DelistDummy variable was −0.107 (t value = −1.81), with a significant negative value at the 10% level. This means that the cash effective tax rate is significantly lower in the delisted samples. When the dependent variable was GAAPETR, the coefficient value of the DelistDummy variable was −0.124 (t value = −2.13), with a significant value at the 5% level. This indicates that the effective tax rate is lower in the delisted samples. These results suggest that delisted firms have a lower effective tax rate, which prove an incentive to tax avoidance in delisted firms.

4.3. Additional Tests

Tax avoidance increases tax risk. It can increase firms’ additional future tax payment and unexpected cash outflows, thus raising tax uncertainty, thereby leading to a higher tax risk. From this perspective, this study also analyzed whether the tax risk of the delisted firms and non-delisted firms differ.

Table 6. Results of additional test.

Variable	stdCashETR				stdGAAPETR
	Coeff.	t-Stat		VIF	Coeff.	t-Stat		VIF
Intercept	10.836	0.44		0.00	10.272	0.44		0.00
DelistDummy	2.747	1.97	**	1.22	2.514	1.91	*	1.22
Size	−1.575	−1.80	*	2.40	−1.491	−1.81	*	2.40
Leverage	−1.640	−0.53		1.63	−1.667	−0.57		1.63
CurrRatio	4.839	1.64		1.54	4.787	1.72	*	1.54
MTB	−0.008	−0.12		1.03	−0.006	−0.09		1.03
lnAGE	4.188	2.87	***	1.74	3.971	2.89	***	1.74
ROA	7.006	1.46		1.63	6.562	1.63		1.59
Lossdummy	2.395	1.43		1.54	2.417	1.54		1.50
MKT	included				included
YearDummy	Included				included
IndDummy	included				included
F-value	4.49				4.50
Adj. R²	0.1087				0.1092
obs	1315				1315

*, **, and *** denote the significance at 10%, 5%, and 1% levels, respectively. Detailed definition of variables is as follows. stdCashETR = standard deviation of CashETR; stdGAAPETR = standard deviation of GAAPETR; DelistDummy = dummy variable with a value of 1 if it was delisted firms, otherwise 0; Size = natural logarithm of total assets; Leverage = total liabilities divided by total assets; CurrRatio = current assets divided by underlying assets; MTB = common stock divided by total equity; lnAGE = natural logarithm of current year minus the year of establishment; ROA = net income divided by total assets; Lossdummy = dummy variable that is 1 if loss occurred in the previous year, otherwise 0 otherwise; MKT = 1 if listed in KOSPI, otherwise 2.

presents the results of the regression analysis using tax risk measurements as dependent variables.

Table 6 shows the results of the analysis of models using stdCashETR and stdGAAPETR as dependent variables. When the dependent variable was stdCashETR, the coefficient value of the DelistDummy variable was 2.747 (t-value = 1.97), with a significant positive value at the 5% level. When the dependent variable was stdGAAPETR, the coefficient value of the DelistDummy variable was 2.514 (t-value = 1.91), with a significant value at the 10% level. This indicates that delisted firms have significantly higher tax risk than non-delisted firms. Therefore, increased tax risk may lead to reduced corporate sustainability.

5. Conclusions

This study analyzed whether the tax strategies of delisted firms differ from those of non-delisted firms. When a listed firm’s corporate sustainability decreases, it may eventually delist. Moreover, the incentives to avoid taxes are expected to increase due to the decline in financial stability that occurs in the delisting process. Accordingly, from the perspective of corporate sustainability, this study analyzed whether delisted firms exhibit higher levels of tax avoidance or tax risk as a result of their tax avoidance than non-delisted firms.

The results of this study are as follows. A comparison of the cash effective tax rate and the effective tax rate—measures of tax avoidance of delisted and non-delisted firms—shows that delisted firms have significantly lower cash effective tax rates and effective tax rates. This result supports the hypothesis that the delisted firms conduct more tax avoidance than non-delisted firms. Previous studies only focused on the financial characteristics of delisted firms but did not directly verify tax avoidance. Our results indicate that delisted firms have greater incentives to avoid taxes. Furthermore, delisted firms have tax risks significantly higher than those of non-delisted firms. These results suggest that tax risk can impact corporate sustainability.

The implications of this study are as follows. This study empirically verified the tax strategies of delisted firms. Prior studies have generally focused on the characteristics of delisted firms or the determinants of delisting but only a few have examined tax strategies. By presenting evidence of a significant relationship between tax strategy and corporate sustainability, this study is expected to contribute to the understanding of corporate tax strategies. The study’s findings are also expected to contribute to evaluations of corporate sustainability.

However, there are several limitations to this study. First, the effects over various periods could not be analyzed in different ways. Second, this study analyzed cases in Korea; however, different results may appear when other countries are analyzed. Therefore, future studies that supplement the limitations of this study are expected. In addition, performing multinational comparisons is advisable.