Tax avoidance, overinvestment, financial reporting quality. Evidence from Italian private firms

Abstract

Purpose

This study aims to examine whether tax avoidance is associated with overinvestment and the moderating role of financial reporting quality on such association in Italian private firms.

Design/methodology/approach

This study uses a multivariate regression analysis based on a sample consisting of 65,535 firm-year observations between 2015 and 2022.

Findings

Results show that tax avoidance is positively associated with overinvestment and that such relation is weaker for firms with a higher financial reporting quality than for firms with a lower financial reporting quality. Furthermore, findings hold to a wide range of robustness checks, including alternative measures of main variables, endogeneity and falsification tests.

Research limitations/implications

Since this study focuses on the Italian private firms, the results cannot be extensively generalized.

Practical implications

As this study highlights the importance of tax avoidance on overinvestment, it can be particularly beneficial for managers, policymakers and other parties interested in assessing factors that lead to a capital allocation in less efficient investments.

Originality/value

This study provides novel evidence about the role of tax avoidance on overinvestment in private firms by mitigating the little attention of prior research in this area. It examines the Italian setting that is particularly of interest given the relevance of private firms in such context and the incentives of managers to reduce the tax burden.