Moderating Effect of the Economic Cycle on the Relationship Between Tax Avoidance and the Value Relevance of Brazilian Publicly Traded Companies

Abstract

This article examines the moderating effect of the economic cycle on the relationship between tax avoidance and the value relevance of Brazilian publicly traded companies, through the lens of Signaling Theory. The sample comprises 278 companies, yielding 2327 firm-year observations over the period from 2014 to 2024. Multiple panel regressions were estimated using the fixed effects method with robust standard errors. The results indicate that the Brazilian market places greater values on more conservative tax avoidance strategies, associating them with managerial efficiency and value creation. In contrast, companies exhibiting low or excessive levels of tax aggressiveness are penalized, particularly during periods of economic expansion, when the quality of financial information becomes especially important. The study incorporates economic fluctuations, characterized by alternating periods of recovery and prosperity and periods of relative stagnation or recession. The findings also show that, during recovery periods, the market is more tolerant of aggressive tax strategies, reflecting companies’ need to preserve cash. Overall, the results reinforce the view that the relationship between tax avoidance and value relevance is non-linear and contingent on the macroeconomic context. Although an overall moderating effect (H2) was observed, H3 was rejected because no statistically significant moderating effect was identified during contraction and recession phases. These findings provide insights for investors, regulators, and managers into how tax planning is perceived across different stages of the economic cycle, thereby broadening the understanding of corporate governance and value creation in emerging markets. By examining the moderating effect of the economic cycle, this study contributes to the literature on tax planning and firm valuation in developing markets, representing an original contribution to the field.