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Kode: CG


Evony Silvino Violita Fa !lta" E ono#i $nive%"ita" Indone"ia

A&"t%a't This paper investigates the impact of concentrated ownership as one of corporate governance factors on tax planning. This research fills in the gap of literature about external concentration ownership and tax management. It finds that firms with high concentrated ownership (H3>75 ! that have no tax loss carr"forward tend to have more negative discretionar" accruals since it has lower financial report cost# while there is no evidence that firms with low and medium concentrated ownership have negative discretionar" accruals. There is marginal evidence that high debt$to$total asset ratio influence the effect of concentrated ownership positivel". %nother findings is that firms with highl" and moderate concentrated ownership are motivated to have lower income since it has low mar&et pressure. However# we cannot conclude that the low ownership concentration firms have motivation to have positive discretionar" accruals. Keywords: corporate governance# concentrated ownership# tax planning# discretionar" accruals

I( INTROD$CTION )( *a' +%o!nd Concentrated Ownership is believed as one factor that can solve agency problem, an important aspect in corporate governance. Agency problem appears as the difference objectives between owners and agent. Concentrated ownership is the condition that a few owners have large portion of interest in a firm. By having large interest, larger shareholders can monitor the firm more easily and closely and it can limit the management from doing things inefficiently. Good monitoring will restrict the manager s cons!mption of non"pec!niary items #$ensen and %ec&ling, '()*+. ,arge investors can then lead management to ma&e policy according to owners objectives rather than the managers objectives. -he impact is that it leads to higher val!e of the firm, and in t!rn, it increases the owners wealth. Claessens #'(()+ arg!es that concentrated ownership can increase the firm val!e. .rom the description, we may interpret that better monitoring and lower agency problem are associated with more concentrated ownership #Claessens '(()+. /t!dies in 0nited /tate mar&et find a positive relation between concentrated ownership and corporate val!ation #1eAngelo and 1eAngelo, '(23, /hleifer and 4ishny, '(2*+. 5owever, that relationship does not ta&e place in every sit!ation. ,arge investors may represent their own interests which not need coincide with the interest of other investors, employees, and managers #/chleifer and 4ishny, '(()+. -he large investors may ta&e decision or lead the management to ta&e decision that is beneficient for them #large investors+, b!t not for minority shareholders. ,arge owners may have higher potential to do e6propriation of minority shareholders. 7t may ca!se the lower val!e of firm. %oreover, ma6imi8ing reported income sometimes is not the optimal strategy 9

#/hac&elford and /hevlin, 9::'+. 7ncreasing income often means increasing ta6 sho!ld be paid to the o!tside party. %inimi8ing ta6 may not be the best strategy either. %inimi8ing ta6 payment is !s!ally followed by lower reported income which may bring abo!t negative impact to mar&et price, and in t!rn, the investors; wealth. -here are trade"off of cost and benefit for both the strategies, performance in one hand and cash flow in another hand. <hich strategy to choose depends on the objectives of the owners. .irm val!e and stoc& price is one of the non"ta6 factors and cash flow is one of ta6 factors. -here is trade"off between ta6 and non"ta6 factors #/hac&elford and /hevlin, 9::'+. /hac&elford and /hevlin #9::'+ describe that financial reporting consideration and agency costs are factors sho!ld be considered in decision ma&ing related to optimal option. %ar&et press!re plays an important role in eval!ating the optim!m option. -he higher the concentrated ownership, the lower the mar&et press!re is. Klassen #'(()+ mentions that as the mar&et press!re increases, the manager most li&ely will increase c!rrent income at the e6pense of overall firm val!e. 7f the ownership of the largest #first = to 3 largest+ reaches a considerably high portion, reported acco!nting may consider owners objectives more than mar&et preference. /ome literat!res disc!ss the infl!ence of corporate governance on firm val!e, s!ch as 1e$ong #9::9+ and .irth and .!ng #9::9+ that investigate the relationship between firm performance and corporate governance, and Claessens #'(()+ disc!ss abo!t corporate governance and e>!ity prices. 5owever, investigating infl!ence of corporate governance to ta6 planning is not yet pop!lar. -here are some literat!res investigate the effect of internal ownership concentrated to earnings management and in t!rn to ta6 management, li&e what Klassen #'(()+ and 1esai and 1harmapala #9::3+ did, b!t not e6ternal ownership concentration. -his paper is filling in the gap of relation of the =

e6ternal #investor+ ownership concentration and ta6 planning. 7nvestor ownership concentration can be a good way to represent mar&et press!re beca!se it tells !s the p!blic portion of the interest. -he higher the p!blic portion, the wider the owners, it is li&ely the higher the mar&et press!re of a firm. 7t capt!res the possibility that management may choose to decrease income rather than to increase income in their ta6 planning as the mar&et press!re is decreasing. ,arge investors can have information easily other than financial reported income, so they &now the ?tr!e@ performance of the firm and they do not really ?care@ abo!t the information reported. ,( Re"ea%'- O&.e'tive" -he objectives of this paper are: 1. to investigate the relationship between concentrated ownership with ta6 plan 2. to compare whether the relationship of concentrated ownership and the ta6 plan is different for firm with high debt. =. to investigate whether firm with large ownership concentration has different effect on the ta6 plan compare to those with non"large concentrated ownership. /( Re"ea%'- Cont%i&!tion" -his paper is e6pected to contrib!te to fill"in the gap of literat!re abo!t the relationship of ownership concentration as a factor of corporate governance and ta6 management. -he findings will give evidences on how the ownership concentration infl!ences the direction of ta6 management. 5ence, related parties s!ch as government, a!ditors, and ta6 a!thority can predict the behavior of firms on ta6 compliance. .or the capital mar&et reg!lator, they will &now what aspects may be !sed by firms with concentrated A

ownership to manage their income. 7t can be !sed to improve capital mar&et reg!lation in order to avoid earnings management that misleading mar&et. -he reminder of the paper proceeds as follows: /ection 77 reviews the related literat!re. /ection 777 develops hypothesis and model to estimate the hypothesis. /ection 74 presents the data, methodology, and empirical test. /ection 4 describes the res!lts and concl!sion, as well as rob!stness test. /ection 47 presents the interpretation of the res!lt as well as analysis and concl!sion.

II( THEORETICAL FRA0EWORK )( La%+e Inve"to%" 1Con'ent%ated O2ne%"-i34 Agency relationship engages principal#s+ and agent to perform some service on their behalf which involves delegating some decision ma&ing a!thority to the agent #$ensen and %ec&ling, '()*+. 7t allows agent #managers+ to do things that is not informed to principals #stoc&holders+. 7t ca!ses a possibility for managers to ma&e decision that ma6imi8e their own interest rather than the principals interest. -he managers also cannot, or prefer not to, f!lly reveal their ability andBor the ?tr!e@ val!e of firm to the stoc&holders thro!gh the limited comm!nication channel available #Klassen, '(()+. 7t is necessary for stoc&holders to e6pend monitoring cost to ma&e s!re that managers ma&e decision for the owners ma6im!m wealth, to handle the agency problem. %onitoring in concentrated ownerhips firm wo!ld be nat!rally closer than a widely"owned firm. Klassen #'(()+ states that the closely"held firms can inform shareholders of the firm s val!e more efficiently thro!gh comm!nication channels other than a!diting financial report or press releases. ,arge shareholders also have power to e6ec!te their decision and governing their firm thro!gh e6ercising voting rights. Beside those benefits, large ownership creates costs. ,arge investors may represent their own 3

interest that may not coincide with interest of other investors #minority+, employees, and managers #/hleifer and 4ishny, '(()+. ,arge investors are potentially to do e6propriation to minority interest. Based on the positive impact of concentrated ownership on monitoring, it leads managers to ma&e decision inline with the owners objectives. <e can then e6pect concentrated ownership leads to better profitability. Claessens, 1jan&ov, and Cohl #'((*+ find evidence that the more concentrated ownership is, the higher the mar&et val!ation of a firm and the higher its profitability. Considering the mar&et press!re, the more concentrated the ownership, the lower the need to p!blicly p!blished information s!ch as reported financial statement and press releases, then the firm face less capital mar&et press!re #Klassen, '(()+. -hen, it is less costly for managers of closely"held corporation to affect transactions to red!ce reported earning as well as ta6es. 7f we relate to /tein #'(2(+, myopic behavior is low in a concentrated ownership firm, beca!se the decision will ta&e actions that increase the val!e of the firm rather than j!st acco!nting earnings. 7nline with /tein #'(2(+ and 1esai and 1harmapala #9::*+, there is a lower gap between earnings observable only by managers and earnings reported to stoc&holders #D " D/+ for concentrated ownership firms #see fig!re '+. ,( Ta5 0ana+e#ent <ith a low mar&et press!re, firm has lower cost to red!ce both reported earnings and ta6. Cost of having low reported earnings is that the mar&etBo!tside sta&eholders will !nderval!e the firm, which is label by Klassen #'(()+ as ?financial reporting cost@. Oppositely, increasing reported earnings will higher ta6 #Klassen, '(()+. -he firm may gain from low ta6 costs witho!t having high financial reported costs in a low mar&et *

press!re. Eegarding the level of ownership concentration, %orc&, /hleifer, and 4ishny #'(22+ find a reverse 0"shape effect of ownership concentration effect on firm val!e and profitability. -here is an incentive"entrenchment trade"off for ownership concentration case #/t!lts, '(22+. %anagement will be motivated to increase firm performance and ownership concentration is getting higher, b!t if the ownership concentration is very large it is easier for large owners to e6propriate the minority interest. 5owever, for firms with large debt from ban& andBor large investment sponsored by ban&, management sho!ld consider the monitoring thro!gh the debt covenant or direct monitoring by ban&. 1ebt covenant !s!ally involves maintaining high financial performance which in t!rn affect the ta6able income. Claessens, 1jan&ov, and Cohl #'(()+ investigate the direct control from ban& to especially high ownership concentration to increase corporate governance in the firm and to increase the val!e of the firm. 5igh control from ban& can decrease the conflict of interest of agency problem. /( Hy3ot-e"i" Develo3#ent Closely"held firms face low mar&et press!re, so it is less costly for s!ch firms to have low income and ta6able income #Klassen, '(()+. ?-ransitory@ component of

income that is independent from period to period can be !sed to do earnings management to decrease ta6 payment. As high ownership"concentration firm is closely monitored by stoc&holders and in t!rn has low mar&et press!re, it is li&ely the management of earnings will be larger. 1iscretionary accr!al is manageable component of earnings. 1iscretionary c!rrent accr!als then can be !sed to meas!re the ta6 management. Hy3ot-e"i" ): .irms with high ownership concentration tend to have more negative discretionary c!rrent accr!als. Ban& can actively manage a firm thro!gh the debt covenant andBor the agreement )

in f!nd sponsored for the firm. .irms s!ppose to maintain good performance to ens!re that the money borrowed can be paid bac& as well as the interest. Claessens, 1jan&ov, and Cohl #'(()+ find that direct control e6ec!table by ban& increases the corporate governance in a firm and in t!rn have a positive association with val!ation of firm. Hy3ot-e"i" ,: 5igh 1ebt of a firm moderating the ownership concentration impact on the discretionary c!rrent accr!als. As %orc&, /hleifer, and 4ishny #'(22+ find that the ownership concentration have a 0"shape in its effect on firm profitability, it is possible that it is done thro!gh the management of earnings that might be motivated by red!cing ta6 payment. 7t is related to /t!lts #'(22+ finding that there is incentive"entrenchment trade"off e6ist in ownership str!ct!re. As the motivation for partic!lar level of ownership concentration, the myopic behavior may be different for each level. Hy3ot-e"i" /: -he discretionary c!rrent accr!al is higher for high ownership concentration compare to low ownership concentration. 6( Co#3etin+ t-eo%y <e can also !se a competing theory to eval!ate the impact of ownership concentration to ta6 management. 7nstead of !sing discretionary c!rrent accr!als, we can !se aggressive ta6 planning for ta6 management. -his paper !ses this competing theory as the rob!stness test. III( RESEARCH DESIGN AND DATA )( O3e%ationali7in+ T-e Hy3ot-e"e" .ollowing G!enther #'((A+, modified from $ones model #'(('+, c!rrent accr!als is estimated with this f!nction:
.%.. it B %it ' - ,i ( )%*+) it B %it ' ! ( ' it

#'+ 2

CACCit is calc!lated following $ones #'(('+: .%.. it - (//.it /cashit ! (//.it /)T1it /IT0it ! . .or firm i time t, CACCit is c!rrent accr!als, Ait"' is lagged total assets, /A,F/ is change in sales, and it is error

term, CA is change in c!rrent assets, cash is change in cash, C is change in c!rrent liabilities, /-1 is change in short"term portion of long"term debt, 7-C is change in income ta6 payable. /-1 and 7-C are removed beca!se these items are not directly related to ta6able income #Din, 9::A+. -he parameter of e>!ation #'+ #i+ is then !sed to estimate discretionary c!rrent accr!als as the different between reported c!rrent accr!als and fitted val!e of e>!ation #'+.
1.%i - .%.. i B %i bi ( )%*+) i B %i !


<here firm i, 1CA is discretionary c!rrent accr!als #1CA+. 1CA res!lt from e>!ation #9+ is then !sed as dependent variable in the hypothesis model #e>!ation A and 3+. )()( O2ne%"-i3 'on'ent%ation Ownership concentration !ses 5erfindahl inde6 of the largest = owners interest to meas!re the ownership concentration. 7t is consistent with the finding of %orc&, /hleifer, and 4ishny #'(22+ that the ownership concentration has 0"shape effect on profitability and firm val!e. 5erfindahl 7nde6 is calc!lated thro!gh the form!la below #%ichelini and Cicford, '(23+:
H3 - ) i9
i ' =


/i is percentage interest owned by each invetors. -he same pro6y is !sed by Claessens #'(()+ and Claessens, 1jan&ov, and Cohl #'((*+ for ownership concentration meas!rement. /ince average five largest owners in 7ndonesia is reaching more than )3G, this (

research !se = largest ownership rather than 3 as commonly !sed by other researchers. Another pro6y commonly !sed is the percentage of largest three investors that will be !sed as the rob!stness test. Other factors sho!ld be considered to infl!ence the discretionary c!rrent accr!als to be !sed in the models are disc!ssed below. )(,( Tax -a6 is incl!ded in the model as a pro6y for marginal ta6 rate. -he magnit!de of accr!als is infl!enced by corporate ta6 rate. Din #9::A+ mentions that firms are constrained by their ta6 planning abilities to minimi8e ta6 cost as well as !sed by Klassen #'(()+ in hisBher model. 5owever, Din !ses ta6 aggresiveness meas!rement while Klassen !ses a d!mmy indicator to capt!re the marginal ta6 rate. -he pro6y to !se for this ta6 indicator is a d!mmy variable, ' if there were net operating losses carryforward and a pre"ta6 loss in the prior year, : otherwise. )(/( Debt Covenant 1ebt"to"Asset ratio has been !sed in prior research as the control to debt covenant restriction. .irms are willing not to violate the debt covenant. 7f the firm has a high val!e of debt"to"e>!ity ratio, it is li&ely for the firm to have positive c!rrent accr!als to increase its income and in t!rn its ta6able income. As this variable is !sed to compare high and low level of debt covenant, this variable is !sing d!mmy which is ' if the debt is reaching 9:G or more, : otherwise. Claessens, 1jan&ov, and Cohl #'((*+ !se investment f!nded by ban& as alternative theory, b!t beca!se lac& of data and debt covenant can be a good tool to capt!re ban& control, debt"to"asset is then !sed in this research.


)(6( Past Profitability <itho!t a control for past profitability, ta6 wo!ld be for both ta6 incentives and poor past performance. 5ence, the interpretation of the ta6 coefficient res!lted from the e>!ation will be diffic!lt #Klassen, '(()+. EOF is !sed in the model to control for differences in past profitability. .!rthermore, the performance in the past will infl!ence the ta6 management in c!rrent period. 7t can represent what Din #9::A+ !ses as earning press!re. -he past performance in this paper is meas!red !sing the average ret!rn on e>!ity year t"= to t"' #9::A"9::*+ )( 8( Firm Size .irm si8e play important role in earnings management as well. ,arger firm are s!bject to political costs #<atts and Himmerman, '(2*+ and it can motivate s!ch a firm to do negative accr!al to red!ce income to lowering the political press!re. Din #9::A+ and G!enther #'((A+ find negative effect of si8e to discretionary c!rrent accr!als. )(9( Market-to-Book Value 7nvestors estimate val!e of firm !sing p!blicly available information. -hey might have information that is not capt!red in reported earnings and the information will be reflected in mar&et price. 7t may infl!ence the management decision in earnings management activities. A high val!e of mar&et"to"boo& val!e ratio tells !s that mar&et observes positive signal of the firm performance in the prior year. 5ence, management sho!ld follow it in order to red!ce the deviation with the f!t!re performance. 7t wo!ld be negative effect on the share price if the prediction of mar&et is lower than the reported earnings. -he research design, we can be seen at fig!re 9. -he factors concerning the variables !sed to meas!re the ta6 management are capt!red in the model below to analyse the first and second hypothesis. -he model starts ''

with !nivariate regression model and then is tested by f!ll m!ltivariate model.
1.% - 3 : ( 3'2.

#A+ #3+

1.%i - a : ( b' 194T%: ( b9 2. ( b= 1 B % ( bA 2. 1 B % ( b3 82+ ( b* 2. 82+ ( b) *7T% ( b2 456 ( e'

where for observation i, 1CAi is 1iscretionary c!rrent accr!als as estimated by e>!ation #=+, 10%-AIi is 1!mmy of ta6 marginal ret!rnJ ' if there were net operating losses carryforward and a pre"ta6 loss in the prior year, OCi is Ownership Concentration !sing 5erfindahl 7nde6, 1BAi is 1!mmy debt"to"total assets, ' if long"term debtBtotal assets is :.9 or more, EOFi is Eet!rn on F>!ity, defined as average of = prior period EOF #t"= to t"'+ to capt!re past profitability, ,K-Ai is Kat!ral logarithm of total asset, %B4i is %ar&et"to"boo& val!e ratio, mar&et capitali8ationBboo& val!e of e>!ity for the prior year #mar&et capitali8ation is mar&et price L o!tstanding common stoc&s+. -his model is e6pected to represent the estimation for hypothesis ' and 9. 5ypothesis = is estimated !sing the same model b!t there will be partition of = gro!p of low ownership concentration #: M 3:G+, moderate ownership concentration #3:G " )3G+ and large ownership concentration #N)3G+. ,( Re"!lt E"ti#ation

-a6 hypothesis predicts that firms with positive ta6able income have greater incentive to manage ta6able income to red!ce ta6 payment. 7t then predicts 10%-AI coefficient to be negative.

Hy3ote"i" ) predicts that firms with highly ownership concentration tend to red!ce ta6able income as lower financial reported cost. 5ence, the b9 is predicted to be negative.

Common theory provide evidence that high debt leads to close control by ban&, so the '9

higher the debt, the management tends to increase firm performance. -he coefficient of is 1BA #b=+ predicted to be positive.

7nteraction of ownership concentration #OC+ and 1BA is incl!ded to test the -y3ot-e"i" , that high debt"to"total asset ratio infl!ence the effect of ownership concentration in opposite way. bA is then predicted to be positive.

%anagement tends to smooth the income from year to year. 5igh performance in the past tend to ca!se high performance earning management in the c!rrent period. -hen we can predict the coefficient of EOF #b3+ as positive.

-here is a possibility that EOF infl!ence the effect of ownership concentration. /ince there is no strong evidence find the common effect, we cannot predict the sign of the coefficient b*. Klassen #'(()+ also face the same case and choose not to predict the coefficient.

7f the mar&et"to"boo& val!e is high, it is li&ely that manager will increase the f!t!re income to avoid bad news to the mar&et. -he coefficient of %B4 #b)+ is then predicted to be positive.

5ypothesis = is predicted by comparing coefficient b9 among the three level of ownership concentration. -he coefficient is predicted to have different sign, negative for large ownership concentration and positive for low and moderate level of ownership concentration. 7t relates to the hypothesis of mar&et press!re. ,arge ownership concentration is believed to have low mar&et press!re, then s!ch the firm will be motivated to have lower income #have negative direction of earnings management+.

/ince this paper !ses simple ordinary least s>!are regression for a cross"sectional data, there sho!ld be test of O,/ ass!mption violation to do. Ass!mption violation tests to cond!ct are normality test, heteroscedasticity test, m!lticolinearity test, and '=

a!tocorrelation test. /( Data and Sa#3le -his research is cond!cted to observe the stoc& traded in 7ndonesian /toc& F6change, cross sectional for year 9::). -he firm to !se in sample sho!ld be listed f!lly d!ring 9::9 to 9::) to ma&e s!re that the firms involved have already been mat!re and stable in the capital mar&et and incl!de all ind!stries e6cept financial related ind!stries s!ch as ban&ing, ins!rance, financing, etc. .rom 99) firms listed in 7ndonesian /toc& F6change, we get ')= observation after ded!cting by =* !navailable data and '2 o!tlier. )( Ro&!"tne"" Te"t Eob!stness test is done to s!pport the res!lt of basic research and to anticipate another direction possibility. -he rob!stness test will be cond!cted by '+ 0se total percentage of the largest three investors rather than 5erfindahl inde6 and 9+ 0se d!mmy variable to test hypothesis = rather than doing partition of the three levels of ownership concentration. -he model for the test p!rpose is:
1.%i - a : ( ;' 194T%: ( ; 9 1 B % ( ; = 2. 1 B % ( ; A 82+ ( ; 3 2. 82+ ( ; * *7T% ( ; ) 456 ( ;2 13: )3 ( ; ( 1)3 ( e'


13:")3 is firms with largest = ownership is between 3:G " )3G, 1 )3 for ownership N)3G. IV( RES$LT AND ANAL:SIS )( De"'%i3tive Stati"ti'" 1escriptive statistics at table ' shows that the average ownership concentration for the largest three ownerships is **G, while the largest five is ):G. ,arge standard deviation is occ!rred for long term debt and mar&et total assets. .rom this view of point, we can 'A

see that firms have large deviation. 7n t!rn, it will infl!ence the nat!re and the environment of the firms. Conse>!ently, it is necessary to be aware on this sit!ation in analy8ing the res!lt. .or this research, the data were divided into three category in order that we can classify observation into similar nat!re. -his is also the reason why the minim!m and ma6im!m val!e is still in a wide range eventho!gh the o!tliers are already ta&en o!t. -able A.9. shows that there is no significant m!lticolinearity problem is fo!nd in the sample, e6cept between interaction variables of OC and debt to total assets or past profitability #EOF+ and its related variables. -his is a conse>!ence of having interaction variables. 5owever it is still lower than :,2, then we can !se this in model. ,( Hy3ot-e"i" E5a#ination ,()( Re"!lt ;o% All Data .rom the table A.= of univariate and multivariate models, both res!lt in non"significant correlation between ownership concentration and the discretionary accr!als. 7t tells !s that, overall, ownership concentration cannot e6plain the discretionary accr!als. 7n other words, we cannot see the effect of ownership concentration on the discretionary accr!als. .rom the res!lt !nivariate correlation between si8e #total assets+ compare to discretionary accr!als, there is no fig!re shows the correlation between the two variables #correlation between ,K-A and 1CA is :,::AA, and the p"val!e N :,:3 for !nivariate model+. 0sing m!ltivariate model, the res!lt does not show different res!lt, there is no significant infl!ence of ownership concentration on discretionary accr!als #p"val!e is :,'(=+. 5ence, we can say that there is no evidence abo!t the relationship between the ownership concentration and discretionary accr!al. -hs res!lt is consistent with with the finding of %orc&, /hleifer, and 4ishny '3

#'(22+ that the effectiveness of the ownership concentration in monitoring the management is a reverse 0"shape effect. 5ence, we cannot see the relationship !sing the whole observations. -he res!lt is then not interpreted either. ,(,( Re"!lt ;o% "e3a%ated data -he e6amination is then contin!ing to test the hypothesis !sing the classification of level of ownership concentration #model #3++, which is the main model of this research. .or this p!rpose, sample is divided into three parts, i.e. observation with ownership concentration O3:G, 3:G")3G, and N)3G. -able A.A. shows that there is no significant evidence of the e6pectation for sample with ownership concentration below 3:G, while the res!lt meets the e6pectation is occ!rred for observation with ownership concentration is higher than )3G #highly concentrated+. 5e only gro!p that probability of ."stat is significant is for gro!p with ownership concentration is N)3G. -he variables that meet o!r e6pectation for b9 #OC+, bA #OCL1B-A+, and b* #OCL EOFt'"=+( Hy3ot-e"i" ). -here is evidence for firms with high ownership concentration #5=N)3G+ that profit firms with no ta6 loss carryforward tend to have more negative discretionary accr!als to red!ce ta6able income #negative significant+. 7t meets the e6pectation that the &ind of firms has lower financial report cost. On the other hand, there is no evidence that firms with low and medi!m ownership concentration have negative discretionary accr!als. #p" val!eN:,:3+. 7t is consistent with the e6pectation.

Hy3ot-e"i" , '*

Consistent with e6pectation, there is marginal evidence #p"val!e is :,:*9+ that high debt" to"total asset ratio infl!ence the effect of ownership concentration in opposite way #positive+. 7t means that if the firm has higher debt, the firm tends to have positive discretionary accr!als. Hy3ot-e"i" / -able A.A shows clearly that firms with highly and moderate ownership concentration have negative sign of coefficient for ownership concentration while there is positive sign for firms with low ownership concentration. 7t is consistent with o!r e6pectation. 7t tells !s that moderate and highly ownership concentration is believed to have low mar&et press!re and that s!ch the firms are motivated to have lower income. 5owever, there is no significant evidence for the lower ownership concentration firms to have positive accr!als. <e cannot say that the low ownership concentration firms have motivation to have positive direction of discretionary accr!als. -he other res!lt tells !s that the coefficient of 10%-AI is negative. 7t tells !s that firms with positive income have motivation to decrease the income #have negative direction of discretionary accr!als+ and compare to firm with negative income. 5owever, the res!lt has no significant p"val!e to prove the e6pectation. Coefficient of interaction between ownership concentration and past performance #OCL EOFt'"= +"b* shows significant positive effect. <e can say that past performance infl!ence the discretionary accr!als decision. 7f the firms have good past performance, the firms tend to increase its income by having positive discretionary accr!als. 5owever, the evidence is only for firm with highly and moderate ownership concentration. -he low ownership concentration firms have insignificant proves.


/( Ro&!"tne"" te"t '. Additional test and more statistically appropriate test to find the different

effect of low, moderate, and high ownership concentration is by !sing d!mmy variables for the three level of the ownership concentration rather than !sing separated sample. -he advantage of this model is that the error of the model is lower than if we separate the sample into three gro!ps. -his paper then !se model #)+ to cond!ct this test. .rom the res!lt of the regression, one coefficient can be interpreted is the difference of ownership concentration effect between low ownership concentration compare to moderate and high ownership concentration. Other variables show non"significant level of p"val!e. By r!nning all ')= observation, !sing 1' for firms with ownership concentration 3:G to )3G, and 19 for firms with ownerships concentration of N)3G, 7 find consistent res!lt with %orc&, /hleifer, and 4ishny #'(22+. -able A.3. Ees!lt for rob!stness test ' 13:")3 1N)3 E9 #adj E9+ p"val!e #."stat+ LL significant for 3G p"val!e :,:==LL p"val!e :,=)* ':,9G #*,3G+ :,:'' LL

-he res!lt above tells !s that the behavio!r of firms with ownership concentration 3:G to )3G are significantly different from for the effect of ownership concentration on the discretionary accr!als compare to lower ownership concentration #OCO3:G+. On the other hand, there is not evidence for difference of ownership with highly concentration #N)3G+ on discretionary accr!als compare to lower ownership concentration. '2


Another rob!stness test cond!cted for this test is !sing alternative

meas!rement of ownerships concentration. Eather than !sing 5erfindahl inde6, this test !sing total ownership for the largest three ownership. -he res!lt is consistent with the main test that !se 5erfindahl inde6. LLsignificant for 3G LLLsignificant for P'G -he res!lt showed in table A.* tells !s that the level of the ownership concentration negatively significant infl!ence the discretionary accr!als for highly ownership concentration. 7t means that the more concentrated a firm, there is more incentive to have lower income thro!gh discretionary accr!als.

V( CONCL$SION )( Con'l!"ion -he test shows !s that there is no clear relationship between the ownership concentration and the discretionary accr!als for firms with lower and moderate level of ownership concentration. All the coefficients of the variables are not significant. Oppositely, the e6pectation is proven for the high level of ownership concentration firms. 5ypothesis ' is proven that the profit firms #no ta6 loss carryforward+ have incentives to lower the income to avoid ta6 e6pense. 7n addition, it tells !s that more concentrated firms have lower mar&et press!re to have higher income. -he second hypothesis is also proven for firms with high ownership concentration level that large debt tend to red!ce the intention to have negative discretionary accr!als. 7t is consistent with e6pectation that debt covenant plays role in increasing performance of firm. Eelated to discretionary accr!als, the incentive to lower the income thro!gh '(

discretionary accr!als is low. -he compare of res!lt of separated gro!ps and rob!stness test shows that firms with higher concentrated ownership have different attit!de towards the discretionary accr!als compare to low ownership concentration. 7n addition, medi!m level ownership concentration #3:G")3G+ have significantly different from low ownership concentration while there is no significant evidence for the difference of highly ownership concentration #N)3G+. -his is consistent with %orc&, /hleifer, and 4ishny #'(22+. ,( Li#itation '. -his st!dy has limitation in terms of variable !sed for marginal ta6 rate pro6y. 7f there is data available, it is s!ggest to !se ta6 aggressiveness rather than d!mmy of ta6 loss carryforward. -his test will come with good e6amination alternative. 9. -his test is !sing e"views A.'. that has no tool to detect the o!tlier a!tomatically. 5ence, there is possibility to still incl!de o!tliers in the sample. 7t can !se soft ware with tool to detect s!ch the problem or do the e6amination with more precise meas!rement. /( F!t!%e %e"ea%'F6amination to cond!ct in the f!t!re is to differentiate the ownership of government and instit!tion. -hese two ownership will bring abo!t different attit!de towards the discretionary accr!als. 7t may come o!t with different res!lt and may be more reliable. Another development can do is to chec& the res!lt !sing several years !sing panel data or separated data for every years.


REFERENCES Claessens, /. #'(()+, ?Corporate Governance and F>!ity Crices: Fvidence from the C8ech and /lova& Eep!blic@, -he $o!rnal of .inance, 4ol. 39, '*A' M '*32. Claessens, /., /. 1jan&ov, G. Cohl #'(()+, ?Ownership and Corporate Governance: Fvidence from the C8ech Eep!blic@, <or&ing Caper, <orld Ban&. 1eAngelo, 5. and ,. 1eAngelo #'(23+, ?%anagerial Ownership of 4oting Eights: A /t!dy of C!blic Organi8ations with 1!al Classes of Common /toc&@ $o!rnal of .inancial Fconomics, 4ol. 'A, =="*(. 1e $ong, A. #9::9+, ?-he 1isciplining Eole of ,everage in 1!tch .irms@, B!siness and .inance Eeview, 4ol. *, Ko. 9, ='"*9. 1emset8, 5. #'(2=+, ?-he /tr!ct!re of Ownership and the -heory of -he .irm@, $o!rnal of ,aw and Fconomics, 4ol. 9*, =)3"=(:. 1esai, %. A. and 1. 1harmapala #9::*+, ?Corporate -a6 Avoidance and 5igh"Cowered 7ncentives@, $o!rnal of .inancial Fconomics, 4ol. )(, 'A3"')(. .ama, F., and %. $ensen #'(2=+, ?/eparation of Ownership and Control@, $o!rnal of ,aw and Fconomics, 4ol. 9*, =:'"=93. .irth, %., C. %. D. .!ng and O. %. E!i #9::9+, ?/im!ltaneo!s Eeationships Ownership, Corporate Governance, and .inancial Cerformance@, <or&ing Caper,, %arch, 9::2. G!enther, 1. A. #'((A+, ?Farnings %anagement in Eesponse to Corporate -a6 Eate Changes: Fvidence from the'(2* -a6 Eeform Act@, -he Acco!nting Eeview, 4ol. *(, Ko. ', 9=:"9A=. $ensen, %. C. and <. 5. %ec&ling #'()*+, ?-heory of the .irm: %anagerial Behavior: Agency Cost, and Ownership /tr!ct!re@ $o!rnal of .inancial Fconomics, 4ol. = Ko. A, =:3"=*:. $ones, $. #'(('+, ?Fanings %anagement d!ring 7mport Eelief 7nvestigations@, $o!rnal of Acco!nting Eesearch, 4ol. 9( #A!t!m+, '(="992. Kelly, <. A. #'(2'+, ?A General 7nterpretation of the 5erfindahl 7nde6@, /o!thern Fconomic $o!rnal, 4ol. A2, ', 3:"3). Klassen, K. $. #'(()+, ?-he 7mpact of 7nside Ownership Concentration on the -rade"Off between .inancial and -a6 Eeporting@, -he Acco!nting Eeview, 4ol. )9, Ko. =, A33" A)A. %ichelini, C. and %. Cic&ford #'(23+, ?Fstimating the 5erfindahl 7nde6 from Concentration Eatio 1ata@, $o!rnal of American /tatistical Association, 4ol. 2:, =(:, =:'"=:3. %orc&, E., A. /hleifer, and <. 4ishny #'(22+, ?%anagement Ownership and %ar&et 4al!ation@, $o!rnal of Fconomics, 4ol. 9:. 9(="='3. i

/hac&elford, d. A. and -. /hevlin #9::'+, ?Fmpirical -a6 Eesearch in Acco!nting@, $o!rnal of Acco!nting and Fconomics, 4ol. =', =9'"=2). /hleifer, A. and E.<. 4ishny #'(()+, ?A /!rvey of Corporate Governance@, -he $o!rnal of .inance, 4ol. 39 Ko. 9, )=)")2=. /tein, $. #'(2(+, ?Ffficient Capital %ar&ets, 7nefficient .irms: A %odel of %yopic Corporate Behavior@, -he Q!arterly $o!rnal of Fconomics, 4ol. ':A, *33"**(. Din, $. #9::A+, ?Farnings %anagement of Crofit .irms and ,oss .irms in Eesponse to -a6 Eate Eed!ctions@, Eeview of Acco!nting and .inance, 4ol. =, ', *)"('.


APPENDIX )( FIG$RE .ig!re ' <e can rewrite /tein s notation for income: D R income observable only by managers D/ R income reveal to stoc&holders D- R income reported to the ta6 a!thorities #D/ M D- is stated as boo&"ta6 gap by 1esai and 1harmapala #9::*++ 7ncome informed to /toc&holders and -a6 A!thorities ClClosely"held firm os el D D/ Dy" he <idely"held firm ld fir D D/ Dm Cl Closely"held firm ca!se the difference between the income observable by manager os only el and income informed to stoc&holders is narrower than that of widely"held firm. y" -he closer the monitoring by the owners to the manager, the better the information capt!red by owners, then the less the information can be &ept by he managers witho!t observable by owners. ld fir m
/o!rce: b!ilt from interpretation of 1esai and 1harmapala #9::*+ notation, combined with closely"held vs. widely"held firm e6planation by Klassen #'(()+


.ig!re 9 Eesearch design


SALES Fitted value

*ast !er+"rman#e $an% #"ntr"l Owners i! C"n#entrati"n $an% C"ntr"l C"ntr"l varia&les' marginal tax rate si(e si(e M$)

Tax Management (DCA)

De!endent varia&le

,nde!endent varia&les


APPENDIX ,: TA*LES -able A.'. descriptive statistics.

CACC #3,' *:+ A,* 2' 9 '' *',3 )9 #AA',* 22+ 9:*,: A2 ' )= '-an+e o; "ale" 3:,A: A (,2= 2 2,:' ( '9(,A: A #':A,:) '+ (22,'9 = ') = OC 1/ la%+e"t4 *3.( 3 '.A 9 *2.A 9 '2.* * 3.( : ().( 3 ') = LTD ':9,*99 9*,A3: ),*)' =9',)29 " 9,2:',22* ')= TA ,<<= A'(,=)= )3,=') (3,*22 ((:,*=3 9,A=3 2,)=*,*9* ')= 0*V '. () :. '= '. 33 '. *3 #'. A2+ 2. =9 ' )= ROEt)>t/ ).*A '.:* *.)= '=.2( #A=.)=+ ):.A' ')=

0ean Standa%d E%%o% 0edian Standa%d Deviation 0ini#!# 0a5i#!# Co!nt

-able A.9. correlation between variables

D?TA D?TA D$0TAX H/ OC@D?TA LNTA OC@ROE)A/ 0*V ROE)A/ '.:: :.:: #:.:(+ :.)= :.=A #:.'A+ :.') #:.'=+ D$0TAX H/ OC@D? TA LNTA OC@RO> Et)>/ 0* V RO> Et)A/

'.:: :.:9 #:.:*+ :.93 :.9* :.'' :.='

'.:: :.=3 #:.:A+ :.A9 :.'= :.:*

'.:: :.9A #:.:'+ :.') #:.''+

'.:: :.9) :.=( :.=(

'.:: :.== :.)*

'.:: :.=*


-Abel A.=. Coefficient #p"val!e+ for res!lt !sing all observation.

1 .% 3

3' 2 .

1.%i - a : ( b' 194T%: ( b9 2. ( b= 1 B % ( b A 2. 1 B % ( b3 82+ ( b* 2. 82+ ( b) *7T% ( b2 456 ( e'

OC !sing 5ervindahl inde6:

OC 1CA 1CA "*,(F":* #:,9'==+ "',=F":3 #:,'(=+ ":,'99 #:,'*3+ :,'99 #:,A32+ D$0 TAX D?TA

H3= S 2 i






Ad. R, :,::2

',33F":3 #:,*9=+

":,::'9 #:,*=+

*,AF":) #:,':+

:,::9 #:,2)+

":,:' #:,92+


-able A.A. Ees!lt !sing partition of sample into three classifications #p"val!e in parentheses+. 4ariables 10%-AI #b'+ #"+ OC #b9+ 1-O-A #b=+ #"+ OCO3:G ":.:=A #:.))+ :.:::'9 #:.=3:3+ OC 3:G")3G ":.99( #:.'9'+ ":.:::'* #:.3)3+ :.=)( #:.99A+ "(F":3 #:.3=3+ ":.::9A #:.)3A+ '.33F":* #:.A'=+ ":.::*3 #.):(+ :.::' #:.(3+ :,'AG :,9 OCN)3G ":.:9= #:.)''+ "=.*F":3 #:.:'A+LL ":.9'2 #:.=*+ 2.2*F":3 #:.:*9+L ":.::= #:.'A)+ 2.3F":) #:.:9(3+LL ":.:'9 #:.=*2+ ":.:::3(* #:.(A+ :,9'G :,:)L

#S+ ":.:=A3 #:.('(+ :.::::( #:.29*+ :.::=2 #:.=*3+ "(.'F":* #:.=*A+ :.:A: #:.'39+ ":.:=' #:.':'+ :,9G

OCL1B-A #bA+#S+ EOFt'"= #b3+ #S+

OCL EOFt'"= #b*+ T ,K-A #b)+ %B4 #b2+ E9 S

p"val!e #."stat+ :,3' Lsignificant for ':G LLsignificant for 3G -able A.*. res!lt for rob!stness test 9 4ariables 10%-AI #b'+ " OCO3:G ":.:'2 #:.2(+

OC 3:G")3G ":.9:* #:.'A9+

OCN)3G ":.::* #:.(+ vi

OC #b9+ 1B-A #b=+ S


:.::=* #:.=3+ ":.9== #:.*A+ :.::) #:.3*+

":.::* #:.'9(+ "',9=AA #:.9('+ :,:93 #:.'(A+ ":.:92 #:.'3=+ :,:::3 #:.':3+ ":.::2= #:.*3+ ":.::99 #:.2((+ '2G :,:2

":,::) #:.:'3+LL :.(9* #:.3'*+ ":,::2 #:.*:)+L ":.:== #:.:::A+ :,:::A #:.:::A+LLL ":.:': #:.A:(+ ":.::'* #:.2=+ :,9AG :,:ALL

OCL1B-A #bA+ S EOFt'"= #b3+ S

:.:': #:.99=+ ":,:::=3 #:.9A+ :.:=* #:.'2=+ ":.:=9 #:.:()+ :,9=G

OCL EOFt'"= #b*+ T ,K-A #b)+ %B4 #b2+ E9 S

p"val!e #."stat+ :,3'* Lsignificant for ':G