The study, titled “Financial Constraints and Corporate Tax Avoidance: Evidence from Indonesian Non-Financial Firms During 2020–2023,” also examined fixed asset intensity and institutional ownership. Neither variable showed a statistically significant individual relationship with the tax-avoidance measure at the 5% significance level. The results offer insight into how companies’ financial conditions and governance characteristics relate to tax decisions during a period that included the COVID-19 shock and the subsequent economic recovery.
Why Financial Pressure Matters for Corporate Tax Decisions
Corporate income tax is an important source of government revenue, supporting public services and other public spending. For businesses, however, tax payments are also a cash outflow that can affect the resources available for operations, investment, and debt repayment.
This creates a tension between companies’ interest in preserving cash and the government’s interest in collecting tax revenue. Companies may use legally available tax-planning arrangements to reduce their tax burden, but their ability to do so can depend on their financial position, access to professional advice, and exposure to regulatory and reputational risks.
Financially constrained companies face difficulties obtaining external financing or may encounter higher borrowing costs. Although these firms have a strong incentive to conserve cash, they may not have the resources or organizational capacity to implement sophisticated tax-planning strategies.
The research by the Universitas Syiah Kuala team examines this tension using data from Indonesian non-financial companies. Its findings challenge the assumption that financial pressure necessarily leads to more corporate tax avoidance.
How the Researchers Analyzed Indonesian Companies
The researchers used financial statements and annual reports from companies listed on the Indonesia Stock Exchange. The sample covered 89 non-financial companies across 10 industry sectors, producing 356 company-year observations for 2020–2023.
The researchers measured financial constraints using the Kaplan–Zingales Index, commonly known as the KZ Index. This indicator combines several aspects of a company’s financial condition, including cash flow, dividends, cash holdings, leverage, and growth opportunities. In the study’s framework, higher KZ values represent greater financial constraints.
Corporate tax avoidance was measured using the difference between Indonesia’s 22% statutory corporate income tax rate and each company’s cash effective tax rate. A larger gap was interpreted as a higher level of tax avoidance.
The analysis also considered fixed asset intensity—the proportion of a company’s assets represented by fixed assets—and institutional ownership, which measures the proportion of shares held by institutional investors. The researchers applied panel-data regression, a statistical method that examines relationships across companies and over time.
The sample included companies from consumer goods, energy, basic materials, industrials, healthcare, infrastructure, property, transportation, technology, and other non-financial sectors. The study’s selection criteria, however, excluded companies that did not meet its listing, profitability, and dividend-policy requirements.
Key Findings: Financial Constraints Have a Negative Relationship With Tax Avoidance
The regression analysis produced three main findings.
1. Financial constraints were significantly associated with lower tax avoidance.
The estimated coefficient for financial constraints was −0.009849, with a p-value of 0.0027. Because the p-value was below 0.05, the relationship was statistically significant.
The negative coefficient means that companies with higher KZ-based financial constraints tended to have lower values on the study’s tax-avoidance measure, after accounting for the other variables included in the model.
This result ran counter to the researchers’ initial hypothesis that financial constraints would be positively associated with tax avoidance. One possible explanation is that companies under financial pressure may lack the resources, specialist advice, or managerial capacity needed to pursue complex tax-planning arrangements. They may also face closer scrutiny from creditors and other stakeholders.
These explanations remain interpretations rather than mechanisms directly tested by the study. The analysis establishes a statistical association, not proof that financial constraints cause companies to reduce tax avoidance.
2. Fixed asset intensity was not significantly associated with tax avoidance.
Fixed asset intensity had a positive coefficient of 0.076003, but its p-value was 0.0642—above the conventional 0.05 threshold.
Although fixed assets can generate depreciation deductions that affect taxable income, the results did not provide sufficient statistical evidence that companies with a higher proportion of fixed assets consistently exhibited greater tax avoidance in this sample.
Depreciation is also a normal accounting and tax mechanism. A company’s fixed asset intensity alone therefore cannot establish whether its tax decisions involve aggressive tax planning.
3. Institutional ownership showed no statistically significant relationship.
Institutional ownership had a negative coefficient of −0.036848, with a p-value of 0.3430. The direction was consistent with the expectation that institutional investors might discourage aggressive tax behavior, but the relationship was not statistically significant.
This suggests that the proportion of shares held by institutions, by itself, may not adequately capture how effectively investors monitor corporate tax decisions. Institutional investors can differ in their objectives, investment horizons, and involvement in company oversight.
The overall regression model was statistically significant, but its adjusted R-squared was approximately 3.01%. This means the included variables explained only a limited share of the variation in the tax-avoidance measure, highlighting the influence that other unexamined factors may have on corporate tax decisions.
Implications for Businesses, Investors, and Tax Authorities
The findings have practical implications for several groups.
For corporate managers, the results suggest that tax planning should be considered alongside financing conditions, compliance obligations, and relationships with creditors. Companies facing financial pressure may need to balance the potential benefits of tax savings against the costs and risks of implementing complex tax strategies.
For institutional investors, the findings caution against treating a high institutional ownership percentage as automatic evidence of effective governance. The quality of monitoring, investor engagement, and the characteristics of individual institutions may matter as much as their aggregate shareholding.
For tax authorities, financial constraints should not be treated as a standalone indicator of corporate tax-avoidance risk. A company’s financial condition must be interpreted alongside other relevant financial, operational, and governance information.
The study also highlights the importance of distinguishing tax avoidance from illegal tax evasion. Because the research uses a cash effective tax rate-based measure, its results may reflect legitimate tax deductions, timing differences, or other tax effects as well as deliberate tax-planning decisions. A lower measured effective tax burden does not, by itself, demonstrate unlawful conduct.
A Contribution to Understanding Corporate Tax Behavior
The research by Makhfira Zahwa Rohali, Mirna Indriani, Muhammad Saleh, and Jhon Andra Asmara adds Indonesian evidence to an ongoing debate about the relationship between financial constraints and corporate tax planning.
Its central finding is that financial pressure does not necessarily correspond to greater tax avoidance. Companies may have stronger incentives to preserve cash while simultaneously facing limitations that reduce their capacity to pursue sophisticated tax strategies.
The researchers also emphasize that the findings should be interpreted within the study’s limitations. The sample excluded companies that did not meet the specified profitability and dividend criteria, and the tax-avoidance measure may capture legitimate tax effects. Future research could compare alternative financial-constraint indicators, extend the observation period, and examine additional factors such as company size, profitability, leverage, multinational activity, and governance quality.
Author Profiles
The study was conducted by Makhfira Zahwa Rohali, Mirna Indriani, Muhammad Saleh, and Jhon Andra Asmara, all affiliated with the Faculty of Economics and Business at Universitas Syiah Kuala, Indonesia. Muhammad Saleh is identified as the corresponding author. Their article examines corporate finance, financial constraints, institutional ownership, and corporate tax avoidance. The supplied manuscript does not specify the authors’ academic degrees or individual fields of expertise.
Source Information
Publication year: 2026, as indicated in the copyright statement; final publication status has not been independently verified
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