Determinants of the complementary level of financial and tax aggressiveness: a cross-country study

This study aims to examine the factors affecting the complementary level of financial and tax aggressiveness. This research considers the diversity of cost and benefit faced by firms when presenting financial and tax reporting aggressively at the same time. Our proxies for cost (the level of detection risk) are country-level variables, namely book-tax conformity and law enforcement. Meanwhile, our proxy for benefit is the financial constraint of a firm. In this study, we develop a new measure of financial constraint which is more comprehensive. Using a sample of listed firms in East Asia and Europe from 2014 to 2016, we find that firms with a higher level of detection risk (such as higher book-tax conformity or stronger law enforcement) tend to engage in a lower complementary level of financial and tax aggressiveness, in accordance with the developed hypothesis. We also find that firms tend to engage in a higher complementary level of financial and tax aggressiveness if they will derive significant benefit from aggressive financial and tax reporting activities. These results suggest that firm and country characteristics influence managers' decisions to present financial statements and tax reporting aggressively at the same time or not.