Corporate tax strategy and the undermining of financial stability in emerging markets

Abstract

This study aims to analyze the influence of corporate tax strategies on financial conditions, using an agency theory approach as a theoretical basis. Tax strategies are measured using the Effective Tax Rate (ETR) as an indicator of aggressive or conservative tax strategies, while financial conditions are proxied through the Altman Z-Score which is categorized into three levels: distress, gray area, and healthy. This study also includes three control variables, namely Debt to Asset Ratio (DAR), company size (Ln Total Assets/TA), and Return on Assets (ROA). This study used secondary data from 539 companies listed on the Indonesia Stock Exchange (IDX) in 2024, analyzed using ordered logistic regression using STATA 17. The results showed that ETR had a positive and significant effect on the Altman Z-Score. This indicates that the more conservative a company's tax strategy, the lower the likelihood of experiencing financial distress. ROA was also found to have a significant positive effect, while DAR and TA had a significant negative effect on financial condition. These findings support agency theory and strengthen the argument that aggressive tax practices can increase the risk of bankruptcy. Therefore, companies need to develop tax strategies that are not only fiscally efficient but also consider the impact on long-term financial sustainability.