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Abstract: 

This article looks at the impact of external audit and tax avoidance behavior on investment problems such as under-investment and over-investment. More specifically, this article adds value to the literature by examining how external audit moderates the relationship between business tax avoidance and investment problems. The authors employ a large sample of European companies listed in the STOXX Europe 600 index over the 2013–2017 period. This sample includes 9 sectors and 17 countries. The regression results show that tax avoidance is significantly negative in terms of investment efficiency and that it increases the over-investment problem. Indeed, when managers forgo investments that produce positive net present value through tax avoidance, companies could be exposed to a problem of over-investment. In addition, the results show that external auditors moderate the behavior of tax avoidance with regard to investment efficiency and over-investment. Audit quality, measured by three proxies, reduces agency costs and improves investment efficiency. These outcomes are robust in relation to other measurements of both investment efficiency and tax avoidance.

Keywords: investment efficiency; tax avoidance; governance; external audit; auditors’ fees; auditors’ rotation; auditors’ notoriety; agency conflict; information asymmetry

Affiliations:  1: University of Sfax; 2: University of Sfax.