The Effect of Foreign Ownership on the Relationship between Corporate Tax Avoidance and Financial Performance

Abstract

[Purpose]This study examines the impact of corporate tax avoidance on short－term financial performance and investigates the moderating role of foreign ownership, aligned with the Korean government’s recent Corporate Value－Up Program emphasizing profitability and tax transparency. [Methodology]Using a sample of KOSPI－listed firms from 2019 to 2024, we conduct multiple regression analyses and robustness tests. Tax avoidance is measured by and , and financial performance is proxied by Return on Assets. [Findings]The empirical results show that tax avoidance significantly deteriorates short －term financial performance, indicating that non－tax costs－such as agency costs, regulatory risks, and reputational damages－outweigh its tax－saving benefits. Furthermore, while foreign ownership positively affects ROA directly, it significantly strengthens the negative relationship between tax avoidance and financial performance, suggesting that foreign investors impose stricter market discipline regarding tax risks. [Implications]This study demonstrates that corporate tax avoidance is not merely a tax－saving strategy but may adversely affect firms’ short－term financial performance. It also provides empirical evidence that foreign ownership significantly moderates the relationship between corporate tax avoidance and financial performance. These findings suggest that ownership structure, particularly foreign ownership, is an important factor in understanding the relationship between corporate tax avoidance and financial performance. Furthermore, the results imply that the successful implementation of the Corporate Value－up Program requires not only improvements in profitability but also greater tax transparency and sound corporate governance.