The relation between product market competition and corporate tax avoidance: evidence from Korea

Abstract

This paper examines the effect of industry-wide factors such as product market competition on corporate tax avoidance. Specifically, the focus is on the moderating role of corporate governance in the relationship between product market competition and tax avoidance. To conduct an empirical analysis, a sample of public companies that are listed on the Korea Stock Exchange between 2001 and 2016 is used. The empirical analyses provide the following results. First, product market competition is negatively related to tax avoidance. This suggests that competitive markets act as external corporate governance mechanisms and discipline managers to decrease tax avoidance. Second, the negative association between product market competition and tax avoidance is more pronounced for firms with more independent board of directors and firms with audit committee consisting of outside directors. These findings imply that product market competition acts more effectively when the firm has strong internal governance mechanisms such as board independence and audit committee independence. Therefore, we provide evidence on a complementary relationship between internal governance system and product market competition. The results may be of interest to policy makers and regulators like Korea Fair Trade Commission and Financial Supervisory Service who are involved in promoting market competition, monitoring any abuse of market dominance, and supervising financial reporting quality.