The impact of tax avoidance, corporate governance, and audit firm affiliation on the weighted average cost of capital (WACC) of publicly listed firms in the Philippines, Malaysia, and Indonesia

Date of Publication


Document Type

Bachelor's Thesis

Degree Name

Bachelor of Science in Accountancy


Ramon V. Del Rosario College of Business




Awarded as best thesis, 2015

Thesis Adviser

Florenz C. Tugas

Defense Panel Member

Alger C. Tang
Aeson Luis C. Dela Cruz
Alloysius Joshua S. Paril
Arnel Onesimo O. Uy
Cynthia P. Cudia


Profuse literature has sought to understand the relationship of tax avoidance with the cost of debt, or of corporate governance with the cost of equity. However, while the cost of debt and cost of equity are good measures of firm performance, considered individually, both fail to reflect the overall risk of the firm. For one, the cost of equity fails to reflect the overall risk of a highly leveraged company. As most companies today typically make use of a combination of debt and equity financing, understanding the impact of tax avoidance and corporate governance on a measure, which effectively captures the inclusive effects of both the cost of debt and equity, is more relevant. Furthermore, most of the prior studies conducted have focused mainly on developed countries. This paper thus sheds a new light as it seeks to determine the effect of tax avoidance and corporate governance on the weighted average cost of capital of publicly listed firms in the context of developing countries. Likewise, with the upcoming ASEAN Integration, the study becomes all the more relevant as the results from member countries, namely, the Philippines, Malaysia and Indonesia, are compared.

More specifically, a sample of 589 publicly listed firms from the Philippines, Malaysia and Indonesia were used. By conducting a panel data regression analysis for each country, results of the study find that the effective tax rate and the cash ratio as measures of tax avoidance were found to have no significant effect on the cost of capital for both the Philippines and Indonesia. On the contrary, ETR and CASHETR were found to have a significant positive and a significant negative effect, respectively, in Malaysia. This suggests that Malaysian investors tend to view tax avoidance activities as value-enhancing and associate higher risk with a company’s failure to remit the appropriate amount of taxes to the government. On the other hand, the cash ratio was found to have an insignificant effect in all three countries due to its inability to accurately capture the level of tax avoidance activities in each country.

Likewise, all three measures of corporate governance, namely, insider ownership, board independence, and CEO duality, were found to have no significant effect on the weighted average cost of capital in all three countries under study. The results may be attributable to each country’s lack of disclosures on compliance with its corresponding corporate governance requirements, which consequently may have resulted in the public’s lack of awareness and their indifference towards these mechanisms. In addition, the insignificant effect may also be attributeable to the prevalence of family-controlled corporations in both Malaysia and Indonesia, and the culture of secrecy in the Philippines. Similarly, big 4 affiliation was also found to have no significant effect on the cost of capital in all three countries, primarily because developing countries tend to have less litigious environments and more lax regulations, thereby diminishing the benefits that could be derived from engaging the services of big 4 firms.

Findings from the research further indicated that firm age, firm size, and leverage all had a significant effect on the cost of capital in the Philippines and Indonesia, and an insignificant effect in Malaysia. This may have resulted from the greater presence of Islamic banking in Malaysia than in the Philippines and Indonesia. Conventional banking tends to focus on the creditworthiness of the borrower, thus explaining the significance of the variables in the Philippines and Indonesia. In contrast, Islamic banking tends to focus on the project’s potential, thus rendering these variables insignificant. Familiarity bias and lower information asymmetry supports the positive relationship between firm age and the cost of capital, while increased bankruptcy risk associated with higher leverage supports its negative relationship with the cost of capital. Lastly, growth opportunities, denoted as the market to book ratio, was found to have a significant effect in Malaysia and an insignificant effect in both the Philippines and Indonesia. This may primarily be attributable to the existence of a semi-strong efficient market in Malaysia, and weak-form efficient markets in the Philippines and Indonesia.

In addition, conducting an analysis of variance and covariance, as well as Tukey’s Post Hoc Test, the research finds that the level of tax avoidance in Indonesia varied significantly with Malaysia and the Philippines. Indonesia and the Philippines were found to have the lowest and highest levels of tax avoidance. This may be attributed to the restrictive limitations imposed upon the available tax options in Indonesia, and the tendency of Philippine tax laws to provide more tax avoidance opportunities to increase the number of multinational corporations and foreign investments in the country. While Malaysia generally allows tax avoidance practices, its General Anti-Avoidance Rules serve as a mitigating mechanism for these activities.

The findings also have significant implications for various shareholders. Corporate management of companies operating in the Philippines and Indonesia may lean towards equity financing, as greater leverage is associated with higher risk. Management of younger, smaller, and highly leveraged firms may also opt to seek financing from Malaysian sources. The board of directors may also require more disclosures to increase transparency and public awareness of corporate governance mechanisms. The Philippine government may establish its own set of General Anti-Avoidance Rules (GAARs) to mitigate the level of tax avoidance in the country. Indonesian governments and financial institutions may promote Islamic banking practices, while financial institutions in the Philippines, being predominantly Catholic, may instead adopt Islamic banking practices in order to boost their competitiveness in light of the upcoming ASEAN Integration. Moreover, the study also opens up more potential research areas to explore, such as understanding the effect of the presence of intervening variables. Other measures of tax avoidance and corporate governance may also be used.

Abstract Format




Accession Number


Shelf Location

Archives, The Learning Commons, 12F Henry Sy Sr. Hall

Physical Description

ix, 278 leaves : illustrations (some color) ; 28 cm. + 1 computer disc 4 3/4 in.


Capital -- Philippines; Capital -- Malaysia; Capital -- Indonesia; Tax evasion -- Philippines; Tax evasion -- Malaysia; Tax evasion -- Indonesia; Equity -- Philippines; Equity -- Malaysia; Equity -- Indonesia

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