THE EFFECT OF EXECUTIVE COMPENSATION, FIRM SIZE,

INSTITUTIONAL OWNERSHIP ON TAX AVOIDANCE ALONG WITH

CORPORATE RISK AS MODERATING VARIABLE
(Empirical Study on Manufacturing Companies Listed on the
Indonesia Stock Exchange 2015-2017 Period)
Mini-Thesis
Designed to fulfill partially requirements to achive bachelor degree in
accounting
Sekolah Tinggi Ilmu Ekonomi Y.A.I
Jakarta
Nama : Inneke Ariesta Wardhani
NIM : 2015031233

Supevisor : Dr. Choirul Anwar, MBA, MAFIS, MCIS,CPA

BAB I
Intoduction
The development of government in Indonesia requires great strength in
carrying out development in the country to improve the national economy.
Important elements to sustain state budget revenue. Taxes are tangible
contributions from a society that can be made to help increase a country's
income. In other words, taxes have a very important and vital role for a
country. The company as a taxpayer is one of the largest tax contributors in
Indonesia and has become a pillar for economic smoothness and
development in Indonesia. Through income tax, tax revenue is one of
Indonesia's main sources of income. Tax sector revenue in Indonesia is the
most potent source of income, almost 70% of the total income of the
Indonesian State is obtained from the tax sector every year. The high tax
revenue sector has caused the government to issue various policies to
optimize tax revenue, among others, by making new regulations on taxation
or revising tax laws. But apparently, there are many obstacles faced by the
government in optimizing tax revenue, one of which is tax avoidance.
Problem Statement

1. Does executive compensation affect tax avoidance?

2. Does the size of the company affect tax avoidance?
3. Does institutional ownership affect tax avoidance?
4. Does the company risk moderate the relationship of executive
compensation against tax avoidance?
5. Does the company risk moderate the relationship of frame size with tax
avoidance?
6. Does the company risk moderate the relationship of institutional
ownership to tax avoidance?
Research Objective

A. To analyze the effect of executive compensation on tax avoidance.

B. To analyze the effect of firm size on tax avoidance.
C. To analyze the effect of institutional ownership on tax avoidance.
D. To analyze the effect of corporate risk in moderating the relationship
of executive compensation on tax avoidance.
E. To analyze the effect of company risk in moderating the relationship
of firm size on tax avoidance.
F. To analyze the effect of corporate risk in moderating the relationship
of institutional ownership on tax avoidance.
Tax Avoidance
Tax avoidance (tax avoidance) is any form of activity that has an effect
on tax obligations, whether permissible activities or special activities to
reduce taxes. Usually tax avoidance is done by utilizing the weaknesses
of tax law and not violating tax laws (Dyreng, et al., 2008).
 Independent Varibales
Executive compensation is an
agency contract between the
company and its managers to bring
together the interests with the
bases of action and effort. Executive
compensation an additional salary
or bonuses for the manager besides
the basic salary. Executive
compensation can be a component
stock, stock options, salary,
allowances and bonuses which are
awarded based on performance.
Most Indonesian companies use
compensation system without base
stocks, which consist of salaries,
allowances and bonuses awarded
based on performance. If salaries
and allowances are fixed
component, the bonuses system can
create motivation for the manager
to improve the performance,
without giving more efforts to tax
avoidance. (Vivi and Winnie, 2016)
Institutional ownership is ownership
foreign investors or banks (Dewi and
firm size is a scale that can classify
companies into large and small
companies according to various
ways such as total assets or total
assets of the company, stock market
value, average sales level, and total
sales. Firm size is generally divided
into 3 categories, namely large firm,
medium firm, and small firm.
Machfoedz (1994) in Kurniasih and
Sari (2013)
management. Voluntary disclosures
of shares owned by the
government, insurance companies,
According to Coles, Daniel, Naveen
Jati, 2014). Because of the
D, Naveen and Lalitha (2004) state
company's responsibility to
that corporate risk (corporate risk) is
shareholders, institutional owners
a mirror of the policies taken by the
have incentives to ensure that
company's leaders. Policy taken by
company management makes
company leaders can indicate
decisions that will maximize
whether they have the character of
shareholder welfare. The existence
risk taking or risk averse. The higher
of institutional owners has an
the corporate risk, the more
important function in improving
executives have the risk taker
supervision so that it is more
character, as well as the lower the
optimal because it is considered
corporate risk, the executive will
capable of monitoring every
have a risk averse character.
decision taken by management
Associated with executive character,
effectively. Thus the high level of
Lewellen (2003) states that the
institutional ownership can lead to
character of risk taker executives is
higher levels of supervision of
more courageous in making
decisions about financing debt, they
find that companies with greater
have complete information about
institutional ownership are more
the costs and benefits of the debt.
likely to issue, predict and predict
something more specific, accurate
and optimistic (Khurana, 2009 on
Darmayanti and Susanto, 2015).
 PENELITIAN TERDAHULU
No. Name Researcher
1 Wijayanti and Merkusiwati (2017)
2 Gusti Ayu Pradnyanita Dewi and
Maria M. Ratna Sari (2015)
3 Putri Melia and Adnan (2017)
4 Fitri Damayanti and
Tridahus Susanto (2015)
Topics Result
The Effect of Proportion of Independent Commissioners,  Proportion of independent directors on the negative impact of tax
Institutional Ownership, Leverage, and Firm Size on Tax avoidance.
Avoidance  Institutional ownership has no effect on tax avoidance.
 Leverage a positive effect on tax avoidance.
Y = Tax Avoidance  Firm size has no effect on tax avoidance.
X = Proportion of Independent Commissioners, Institutional
ownership, Leverage, Firm size
The Effect of Executive Incentive, Corporate Risk and Corporate  a negative effect on the risk of corporate tax avoidance.
Governance in Tax Avoidance.  Executive incentives, institutional ownership, independent
directors and audit committee has no effect on tax avoidance.
Y = Tax Avoidance  Audit quality has positive influence on tax avoidance.
X = Executive Incentive, Corporate Risk, Corporate Governance
The Effect of Financial Distress, Executive Characteristics, and  Financial distress, executive characteristics, and executive
Executive Compensation on Tax Avoidance in Jakarta Islamic compensation together show a mutually influential relationship to
Index Companies. tax avoidance.
 Financial distress, executive characteristics, compensation affects
Y = Tax Avoidance tax avoidance.
X = Financial Distress, Executive Characteristic, Executive
Compensation
The Effect of Audit Committee, Audit Quality, Institutional  corporate risk and return on assets influence the tax avoidance.
Ownership, Company Risk and Return On Asset On Tax  audit quality, audit committee and ownership institutional didn’t
Avoidance. influence the tax avoidance.
Y = Tax Avoidance
X = Audit Committee, Audit Quality, Institutional Ownership,
Company Risk, Return On Assets
KERANGKA KONSEPTUAL
Independen

Executive Compensation (X1)

H1 (+)

Firm Size (X2) H2 (+)

Dependen:
H3 (+)
Tax Avoidance
Institutional Ownership (X3)
(Current ETR)
H4 (+)
H5 (+)

H6 (+)

Moderation

Corporate Risk (X4)

Development Hypothesis
Ha1 : There is an influence of Executive
Compensation to Tax Avoidance.

Ha2 : There is an influence of Firm Size to Tax

Avoidance.

Ha3 : There is an influence of Institutional

Ownership to Tax Avoidance.
Ha4 : There is an influence of Executive
Compensation on Tax Avoidance that are
moderated by Corporate Risk
Ha5 : There is an influence of Firm Size on Tax
Avoidance that are moderated by Corporate
Risk
Ha6 : There is an influence of Institutional
Ownership on Tax Avoidance that are
moderated by Corporate Risk
VARIABLE PENGUKURAN
This variable is measured using the natural log of the total
compensation given in the year by the company to the board of Firm size can be described by the formula:
directors and board of commissioners 𝑆𝐼𝑍𝐸 = LN 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡
𝐾𝑂𝑀𝑃 = 𝐿𝑁(𝐸𝑥𝑒𝑐𝑢𝑡𝑖𝑣𝑒 𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛)

Tax avoidance : Measurement of tax

avoidance variables is measured by the
formula:
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑎𝑥
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐸𝑇𝑅 =
𝑝𝑟𝑒 𝑡𝑎𝑥 𝑖𝑛𝑐𝑜𝑚𝑒
This variable can be measured by the percentage of institutional Measurement of this variable can be measured using standard
ownership: EBITDA deviations:
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑠ℎ𝑎𝑟𝑒𝑠
Institutional Ownership: × 100% 𝐸𝐵𝐼𝑇
𝑡𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝐷𝑒𝑣𝑖𝑎𝑠𝑖 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 =
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑒𝑡
Reseach Methodology
Population : Manufactures Companies listed on the Indonesian Stock Exchange (IDX)

Data collection techniques : secondary data, http://www.idx.co.id.

Sample : Purposive sampling technique

The criteria used in selecting samples in this study are as follows:
• Manufacturing companies that have reported annual reports and financial reports that have been audited,
for 3 years in a row on the Indonesia Stock Exchange from 2015 to 2017.
• Manufacturing companies that report audited annual reports and financial statements in the 2015 to 2017
rupiah currency.
• The company has profits before the tax burden and after a positive tax burden for the period 2015-2017.
• Annual reports and audited financial statements have all the information needed in calculating each
research variable.
 Estimation

TEKNIK PENGUJIAN Model Test

Common Fixed Effect Random

Effect Model Model Effect Model

Regression
Model Selection

Lagrange
Chow Test Hausman Test
Multiplier Test

Assumption Classic
Test

Autocorrelation Multicollinearity Heteroscedasticity

Test Test Test

Significant Test

Determination
F Test T Test Coefficient(R²)
Test
No Explanation Total

Number of observation objects (manufacturing companies

1. 133
listed on the IDX in a row during 2015-2017)

Companies that do not publish full annual reports and

2. annual financial reports during 2015-2017 and do not 20
report in rupiah (Rp)
Companies with negative earnings and income before
3. 39
income tax are negative
Companies that provide incomplete variable data during
4. 55
the 2015-2017 period
5. Total of companies used 19
6. The period of observation was 2015-2017 3
7. The total sample used in the study 57
Total samples during the study period 150
Descriptive analysis
Descriptive statistics testing is a method used to describe the state of
quantitative data in a study. This study describes the measurement
results of the mean or mean, maximum (maximum) value, minimum
value, and the standard deviation value (standard deviation) of each
variable studied.
TA COR COMP INS SIZE COMPCOR INSCOR SIZECOR

Mean 0.354049 0.089795 23.44077 0.608134 28.49435 2.129831 0.055532 2.579648

Median 0.274920 0.080180 23.20153 0.598670 27.98924 1.912210 0.049410 2.322890
Maximum 2.298840 0.206330 27.58384 0.960910 32.15098 4.836560 0.137530 5.830400
Minimum 0.067270 0.006250 20.35372 0.051430 26.33816 0.138680 0.001850 0.174730
Std. Dev. 0.330430 0.044213 1.881130 0.175885 1.638164 1.107130 0.033937 1.314535
Probability 0.000000 0.146087 0.173337 0.097982 0.023998 0.114749 0.019105 0.132002
Observations 57 57 57 57 57 57 57 57
Selection of Data Panel Regression
Model
• the conclusion from the
Likelihood Ratio Test
results is rejecting H0, so
the better model used in
this study is the Fixed
Effect Model (FEM).
Chow Test
Result : 0.0001
Hausman test
Result : 0.1702 • so the most appropriate
model is used the
• the conclusion of the random effect model.
Hausman Test results is
that Ho is accepted, so a
better model used in this
study is the Random
Effect Model (REM).
LM Test :
0.0008
Assumption Classic Test

F Test T Test
Coefficient of Compensation Executive :
Determination Test the F value is 3.076293
with a p-value of 0.0008
0.012166 where <0.05 Institutional Ownership:
The independent means that the 0.7407
variables studied independent variable Firm Size : 0.0063
were able to explain simultaneously
the Tax Avoidance significantly influences Compensation Executive
variable of 0.181977 the dependent variable. moderate by Corporate Risk :
0.0095
Institutional Ownership
moderate by Corporate Risk :
0.6887
Firm Size moderate by
Corporate Risk : 0.0107
Discussion Result
Variable Relationship Found Significant

Compensation executive Have an Effect Significant

Firm size Have an Effect Significant

Institutional ownership Don’t have an Effect Not significant

Compensation executive Have an Effect Significant

moderating by corporate risk

Firm size moderating by Have an Effect Significant

corporate risk
Institutional ownership Don’t have an Effect Not significant
moderating by corporate risk
Limitation
a. Regarding the sample used by the author only uses the manufacturing
sector
b. The study uses quantitative data in which all variables in this study are
calculated data that are at risk of errors in calculations
c. This study uses a limited time vulnerable that is 2015 to 2017. This
causes the data collected to be small, so that it can affect the quality and
accuracy of the research results.
d. Very few companies put nominal executive compensation in the 2015-
2017 financial statements
e. This study only uses the current effective bag rate in calculating tax
avoidance.