The Role of Earnings Management in Relation between Tax Avoidance and Investor Reaction: The Case of Indonesia

Abstract

The research aims at examining the role of earnings management in relation between tax avoidance and investor reaction in Indonesia. This study investigated how the earnings management as a basis of management on tax avoidance has an effect for investor reaction. The population of this research covers the entire corporate registered in The Indonesian Stock Exchange from 2009 to 2012. The sample of this research refer to the manufacturing company which was assumed avoiding tax. Total samples are 80 companies. Purposive sampling method is used in this research and Structural Equation Modeling (SEM) with program of WarpPLS 4.0 version is utilized in analyzing and testing hypothesis. This research is also offering a new measurement for tax avoidance, is tax avoidance rate (TAR). Tax avoidance rate (TAR) can be used to knows how much tax avoidance conducted by company. The findings showed that tax avoidance have direct and indirect effect to the investor reaction. Earnings management mediates the relation of tax avoidance and investor reaction. This result evinced that tax avoidance and earnings management are as signal for investor who will influence their investment decision. Investor can assess whether tax avoidance conducted by company for company's interest or as the tool in doing the earnings management.