Conditional Accounting Conservatism and Corporate Tax Avoidance: Evidence from Listed Insurance Firms in Nigeria
Abstract
This paper focuses on the complex interaction between conditional accounting conservatism and corporate tax avoidance in the context of the peculiar insurance industry of Nigeria. The study is based on the Agency and Deterrence theories where it is hypothesized that asymmetric timeliness of conditional conservatism conditional recognition of losses and delayed recognition of gains is a dual-purpose mechanism. It reduces the opportunism of managers and at the same time affects corporate tax strategies. The paper uses the Autoregressive Distributed Lag (ARDL) bounds testing model on cointegration with a longitudinal data comprising of 10 insurance companies listed on the Nigerian Exchange Group (NGX) between 2010 and 2023. Basu (1997) asymmetric timeliness model is used to measure conditional conservatism and the Cash Effective Tax Rate (Cash ETR) and of Henry and Sansing (H&S) measure of tax avoidance. The results demonstrate that there is a statistically significant negative association between conditional conservatism and the Cash ETR, and thus, with the higher the conditional conservatism is in firms, the less tax burdens are reported in the long-term. Nevertheless, the correlation between the H&S measure is less obvious. The paper concludes that conditional conservatism is an important restriction of tax avoidance, first of all, it places restrictions on the extent to which accruals-based earnings management could occur, and secondly, it enhances the level of financial reporting transparency, which aligns with the provisions of Agency and Deterrence theories. Such reflections have important implications on regulators, standard-setters, and management of firms in developing economies.
Downloads
References
Allingham, M. G., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3–4), 323–338.
Avi-Yonah, R. S. (2006). The three goals of taxation. Tax Law Review, 60, 1–28.
Ball, R., & Shivakumar, L. (2005). Earnings quality in UK private firms: Comparative loss recognition timeliness. Journal of Accounting and Economics, 39(1), 83–128.
Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3–37.
Beaver, W. H., & Ryan, S. G. (2005). Conditional and unconditional conservatism: Concepts and modeling. Review of Accounting Studies, 10(2–3), 269–309.
Besley, T., & Persson, T. (2014). Why do developing countries tax so little? Journal of Economic Perspectives, 28(4), 99–120.
Christensen, J., & Murphy, R. (2004). The social irresponsibility of corporate tax avoidance: Taking CSR to the bottom line. Development, 47(3), 37–44.
Cobham, A., & Janský, P. (2018). Global distribution of revenue loss from corporate tax avoidance: Re-estimation and country results. Journal of International Development, 30(2), 206–232.
Crivelli, E., De Mooij, R., & Keen, M. (2016). Base erosion, profit shifting and developing countries. FinanzArchiv: Public Finance Analysis, 72(3), 268–301.
Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145–179.
Desai, M. A., & Dharmapala, D. (2009). Corporate tax avoidance and firm value. The Review of Economics and Statistics, 91(3), 537–546.
Dularif, M., & Rustiarini, N. W. (2022). Deterrence theory in tax compliance: A systematic review. Journal of Financial Crime.
Dularif, M., Sutrisno, T., & Saraswati, E. (2019). The effect of tax aggressiveness on tax avoidance: Does internal control system matter? Journal of Indonesian Economy and Business, 34(1), 1–15.
Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2008). Long-run corporate tax avoidance. The Accounting Review, 83(1), 61–82.
Frank, M. M., Lynch, L. J., & Rego, S. O. (2009). Tax reporting aggressiveness and its relation to aggressive financial reporting. The Accounting Review, 84(2), 467–496.
Gan, H. (2018). Conditional conservatism and tax avoidance: Evidence from the United States. Journal of Accounting and Public Policy, 37(5), 402–419.
García Lara, J. M., García Osma, B., & Penalva, F. (2009). Accounting conservatism and corporate governance. Review of Accounting Studies, 14(1), 161–201.
Hamid, F., Zaid, A., & Suleiman, M. (2023). Accounting conservatism and tax avoidance: Evidence from Nigeria. Journal of Accounting in Emerging Economies.
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2–3), 127–178.
Henry, E., & Sansing, R. C. (2014). A new measure of corporate tax avoidance. Tuck School of Business Working Paper, (2750124).
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Kim, J.-B., Li, Y., & Zhang, L. (2011). Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of Financial Economics, 100(3), 639–662.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326.
Purwantini, A. H. (2017). The effect of accounting conservatism on tax avoidance: The role of book-tax difference as intervening variable. Journal of Applied Accounting and Taxation, 2(2), 117–126.
Umobong, G. A. (2025). Accounting conservatism and corporate governance: Evidence from Nigeria. Journal of Accounting and Corporate Governance, 12(1), 1–20.
Watts, R. L. (2003a). Conservatism in accounting part I: Explanations and implications. Accounting Horizons, 17(3), 207–221.
Yuniarsih, N. (2018). The effect of accounting conservatism and corporate governance mechanism on tax avoidance. Journal of Applied Accounting and Taxation, 3(1), 1–9.
The authors and co-authors warrant that the article is their original work, does not infringe any copyright, and has not been published elsewhere. By submitting the article to GPH-International Journal of Social Science and Humanities Research, the authors agree that the journal has the right to retract or remove the article in case of proven ethical misconduct.
Firozpur Jhirka, Haryana, India
