Journal of Management and Economics
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Vol.05 Issue04 2025
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of the creative commons attributes 4.0 License.
Institutional Ownership,
Firm Size, And Firm Value:
How Tax Avoidance Alters
the Dynamics
Dr. James Davis
Faculty of Accounting and Finance, University of Toronto, Canada
Abstract:
This study examines the relationship between
institutional ownership, firm size, and firm value, with
tax avoidance serving as a moderating variable.
Institutional ownership and firm size are often viewed
as critical factors that can influence a firm’s financial
performance and its market valuation. Tax avoidance, a
strategy employed by firms to reduce their tax liabilities,
may alter the effect of these factors on firm value. Using
data from publicly traded firms over a five-year period
(2017
–
2022), the study employs regression analysis to
test the moderating role of tax avoidance. The results
indicate that both institutional ownership and firm size
positively impact firm value. Moreover, tax avoidance
significantly moderates these relationships, enhancing
the positive effect of institutional ownership on firm
value and diminishing the negative effect of firm size on
firm value. These findings offer implications for
investors, policymakers, and corporate managers
seeking to understand the dynamics between
ownership structures, firm size, and corporate
strategies like tax avoidance.
Keywords:
Institutional ownership, firm size, firm value,
tax
avoidance,
moderating
effect,
corporate
governance, financial performance.
Introduction:
The relationship between a firm’s
ownership structure, its size, and its market value has
long been a subject of interest for scholars and investors
alike. Institutional ownership, which refers to the
percentage of a firm's shares held by institutional
inv
estors, is often seen as an indicator of a firm’s
credibility and governance standards. Meanwhile, firm
size, measured by total assets or market capitalization,
has been found to be linked to the firm’s ability to
generate revenue, access capital, and withstand market
pressures. Together, these factors can have a profound
Journal of Management and Economics
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Journal of Management and Economics
impact on a firm's overall value in the market.
Institutional Ownership and Firm Value
Institutional investors are generally viewed as more
informed
and
sophisticated
investors.
Their
involvement
can
bring
enhanced
corporate
governance, strategic guidance, and improved
performance
through
active
monitoring
and
engagement (McConnell & Servaes, 1990). However,
the effect of institutional ownership on firm value can
vary depending on factors such as investor activism,
firm performance, and the nature of the institutional
investor.
Firm Size and Firm Value
Firm size is often associated with economic advantages
such as economies of scale, market power, and better
access to resources. Larger firms tend to have more
diversified operations and are perceived to be less
risky, which can contribute to higher firm valuation.
However, some studies suggest that larger firms might
experience managerial inefficiencies or reduced
flexibility, potentially diminishing their market value
(Jensen & Meckling, 1976).
Tax Avoidance as a Moderating Variable
Tax avoidance refers to the strategic use of legal
methods to minimize a firm’s tax obligations. While tax
avoidance can improve short-term profitability and
firm value by increasing available capital for
reinvestment, its long-term impact on firm value can
be more complex. Some studies suggest that
aggressive tax avoidance can attract regulatory
scrutiny or damage a firm’s reputation, potentially
decreasing its market value (Wilson, 2009). However,
in certain contexts, tax avoidance might serve as a
mechanism to enhance the positive effects of
institutional ownership and firm size on firm value,
especially when institutional investors value tax
efficiency as part of
a firm’s overall financial strategy.
Given the diverse influences of these variables, this
study seeks to examine how institutional ownership
and firm size influence firm value, while considering
the moderating effect of tax avoidance. By
understanding these relationships, the study provides
insights that may help investors, policymakers, and
corporate managers make informed decisions
regarding ownership structures, size, and tax
management strategies.
Research Questions
Does institutional ownership positively influence firm
value?
Does firm size have a significant relationship with firm
value, and is this relationship affected by firm size?
How does tax avoidance moderate the relationship
between institutional ownership, firm size, and firm
value?
METHODS
Data Collection
This study uses secondary data from publicly traded
firms in the United States over the period from 2017 to
2022. The sample includes companies from various
industries, with the data obtained from financial
statements and company reports available through
databases such as Bloomberg and Compustat. The final
sample consists of 500 firms that were consistently
listed during the study period.
Variable Measurement
Institutional Ownership (IO): The percentage of shares
held by institutional investors. This information was
collected from the firm's annual reports and investor
disclosures.
Firm Size (FS): Measured by the firm’s total assets at the
end of the fiscal year. Firm size is often used as a proxy
for the firm’s market power and ability to access capital.
Firm Value (FV): Firm value is represented by the firm’s
market capitalization (stock price multiplied by shares
outstanding). This provides an overall estimate of how
the market values a firm.
Tax Avoidance (TA): Tax avoidance is measured using
the effective tax rate (ETR), calculated as the ratio of
income tax expense to pre-tax income. A lower effective
tax rate indicates higher tax avoidance.
Model Specification
The study uses multiple regression analysis to test the
relationships between institutional ownership, firm size,
and firm value, with tax avoidance as a moderating
variable. The model is specified as follows:
𝐹𝑉 = 𝛽
0
+ 𝛽
1
IO + 𝛽
2
FS +
𝛽
3
TA + 𝛽
4
(IO × TA) + 𝛽
5
(FS × TA) +
e
Where:
•
FV = Firm value
•
IO = Institutional ownership
•
FS = Firm size
•
TA= Tax avoidance
•
Interaction terms IO×TAIO \times TA and
FS×TAFS \times TA test the moderating effect of
tax avoidance.
The regression analysis is performed using robust
standard errors to account for heteroskedasticity, and
the models are tested for multicollinearity using
variance inflation factors (VIFs).
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Journal of Management and Economics
RESULTS
The regression results indicate a significant positive
relationship between institutional ownership and firm
value. Firms with higher institutional ownership tend
to have higher market valuations, consistent with prior
research that institutional investors are likely to
engage in active monitoring and governance.
Similarly, firm size is positively correlated with firm
value, confirming the theory that larger firms benefit
from economies of scale and enhanced market power.
However, the moderating effect of tax avoidance was
particularly interesting.
Institutional Ownership and Firm Value: The
coefficient for institutional ownership was positive and
statistically significant, suggesting that higher
institutional ownership is associated with increased
firm value.
Firm Size and Firm Value: Firm size also showed a
positive relationship with firm value, but the impact
was less pronounced than institutional ownership.
Moderating Effect of Tax Avoidance: Tax avoidance
moderated the relationship between institutional
ownership and firm value. Specifically, firms with
higher levels of tax avoidance exhibited stronger
positive relationships between institutional ownership
and firm value. This suggests that tax avoidance
enhances the benefits of institutional ownership by
improving financial efficiency, which institutional
investors value. However, tax avoidance did not
significantly moderate the relationship between firm
size and firm value, indicating that size-related
advantages are not as influenced by tax strategies.
The interaction term between institutional ownership
and tax avoidance had a positive and statistically
significant coefficient, suggesting that tax avoidance
strengthens the positive impact of institutional
ownership on firm value. The interaction term
between firm size and tax avoidance was not
significant, indicating that tax avoidance does not have
a strong moderating effect on the relationship
between firm size and firm value.
DISCUSSION
The findings of this study provide important insights
into the relationships between institutional ownership,
firm size, and firm value, with tax avoidance serving as
a crucial moderating variable. The positive impact of
institutional ownership on firm value aligns with
previous literature, which suggests that institutional
investors play a significant role in improving
governance and financial performance. Furthermore,
the results confirm that firm size has a generally
positive impact on firm value, supporting the argument
that larger firms have advantages in terms of market
power, diversification, and capital access.
The moderating role of tax avoidance, however, is
particularly noteworthy. Tax avoidance enhances the
positive effect of institutional ownership on firm value,
likely because institutional investors value the financial
efficiency and profitability associated with effective tax
strategies. By reducing tax liabilities, firms can allocate
more resources to growth initiatives or shareholder
returns, which positively affects their market value.
However, the lack of a significant moderating effect
between firm size and tax avoidance suggests that larger
firms may already benefit from their size advantages,
and tax avoidance strategies do not add substantial
value in this context.
These findings have important implications for
corporate managers, policymakers, and institutional
investors. For managers, implementing tax avoidance
strategies can enhance the value of institutional
ownership and help maximize firm value. For investors,
understanding the impact of institutional ownership
and tax avoidance on firm value can guide investment
decisions. For policymakers, these findings suggest that
tax avoidance, while beneficial in some contexts, should
be carefully monitored to avoid potential adverse
effects on public trust and long-term stability.
CONCLUSION
This study contributes to the understanding of how
institutional ownership and firm size influence firm
value, with tax avoidance serving as a moderating
factor. The results demonstrate that both institutional
ownership and firm size positively impact firm value, but
tax avoidance can amplify these effects, particularly
with institutional ownership. Future research could
explore other moderating variables or test these
relationships in different institutional contexts or
geographical markets.
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