Abstract:

The aim of this study is to analyze the effect of tax avoidance on firm risk by examining the effect of quality of accounting information and family ownership on the relationship between tax avoidance and firm risk, this study fills the research gap of previous literature. This study was conducted by taking sample from Indonesia, a developing country, due to the country’s specific characteristics relating to risks. Data are collected from Indonesia Stock Exchange for the period 2013-2015; the period before the tax amnesty program was launched in Indonesia. The results of this study indicate that tax avoidance increases risk level faced by firms, and that the quality of accounting information generated by a company weakens the positive relationship between tax avoidance and firm risk. This suggests that quality of accounting information reduces the uncertainty of tax avoidance strategies. This study, however, cannot find any effect of family ownership on the positive relationship between tax avoidance and firm risk. Overall, the findings of the study suggest that strategies for minimizing tax payments should be accompanied by good quality information to be effective in reducing risk. The results are robust as shown by the sensitivity tests, which were conducted by using other tax avoidance measure i.e. discretionary permanent difference.