Tax minimisation and firm value with the moderating effect of corporate governance on UK’s FTSE 350.

Abstract

Tax minimisation is a corporate financial strategy which can improve profitability by retaining earnings, thus lowering the need for external capital. The resulting tax minimisation, while often legal, represents a loss of revenue to the government and shifts the cost of public services to others. Governments, including the UK, have tried in recent years to take a stronger line on such activities, with mixed results. However, the overall effect of tax minimisation on firm value is still obscure. To understand tax minimisation in greater depth, this study examines two primary questions: Firstly, how does the relationship between tax minimisation and firm value vary across different methods of tax minimisation? Secondly, do corporate governance mechanisms affect the level of tax minimisation and in consequence, firm value? The results of this research contribute to knowledge by shedding light on both the extent of variation and evaluation regarding the relationship between different components of tax minimisation and different measures of firm value, with reference to corporate governance characteristics in UK FTSE 350 companies. Additionally, the results of this research support shareholders and tax authorities in recognising, observing and monitoring tax minimisation activities in one side and support managers to understand the consequences of utilising different components of tax minimisation in promoting profitability. This study investigates the association between different components of tax minimisation and firm value, and examines the moderation role that corporate governance mechanisms play on this relationship. The findings help in providing evidence that tax minimisation valuation by investors varies across different components and different indices. The study furthers the understanding of the reason underlying the difference in the findings of the relationship between tax minimisation and firm value by shedding light upon firm value from different angles by studying both investors and managers perspectives towards firm value. This differentiation in both viewpoints is considered to be one of the research contributions to the existing body of knowledge. The results of this research show that it is significant to examine the indices separately to understand the behaviour trends as each index has different characteristics and perceptions, and thus, different outcomes.