Analysis of the Effect of Financial Ratios on Tax Avoidance with Earnings Management as a Mediating Variable

Abstract

This study examines the relationship between profitability, earnings management, and tax avoidance in property and real estate companies in Indonesia. Using data from 14 publicly listed companies during 2017-2022, this study utilizes multiple linear regression and mediation analysis to investigate: 1) the direct effect of profitability on tax avoidance, 2) the effect of profitability on earnings management, 3) the impact of earnings management on tax avoidance, and 4) the mediating role of earnings management. The results showed a significant positive relationship between the three variables. Higher profitability is associated with increased earnings management and tax avoidance. Earnings management is also positively correlated with tax avoidance. Furthermore, earnings management partially mediates the relationship between profitability and tax avoidance. These findings contribute to the literature on corporate finance practices by shedding light on the complex dynamics between financial performance, reporting strategies, and tax planning. The research highlights the need for increased regulatory oversight and strong corporate governance mechanisms to ensure financial reporting integrity and tax compliance. The study also provides valuable insights for policymakers, investors, and other stakeholders in understanding and addressing aggressive financial manipulation and tax avoidance strategies in the corporate sector.