Moderating effect of audit quality: the case of political connection, executive compensation and tax aggressiveness

Main Article Content

Agus Sihono
Agus Munandar


The study examines the moderating effect of audit quality on relationship between political connection, executive compensation on tax aggressive. The secondary data used for this study in the form of financial statements of 56 financial sector firms listed on Indonesian stock exchange from 2018 to 2021. Moderated Regression Analysis used for analyzed data. Result indicate, that political connection positively affected tax aggressive. These result support the view of grabbing hand theory, where a bureaucrat who occupies a position in the company will be controlled by the corporation because they get welfare. Furthermore, we find that executive compensation negatively affected tax aggressive. The result of moderation analysis show that audit quality can weaken the relationship of executive compensation on tax aggressive. These findings of this research suggest that audit quality is an effective corporate governance mechanism, thereby protecting users against the opportunism and fraud by managers. This show that corporate governance is able to mitigating information asymmetry that exist in the relation between agent and principals.


Download data is not yet available.

Article Details

How to Cite
Sihono, A., & Munandar, A. (2023). Moderating effect of audit quality: the case of political connection, executive compensation and tax aggressiveness . Jurnal Ekonomi Modernisasi, 19(1), 15–30.


Abdullah, Hashmi, M. A., Mateen, A., Badshah, Y. A., & Iqbal, M. S. (2022). Does tax aggressiveness and cost of debt affect firm performance ? The moderating role of political connections. Cogent Economics & Finance, 10(1), 1–17.

Adhikari, A., Derashid, C., & Zhang, H. (2006). Public policy, political connections, and effective tax rates: Longitudinal evidence from Malaysia. Journal of Accounting and Public Policy, 25(5), 574–595.

Agarwal, S., Duchin, R., & Sosyura, D. (2012). In Mood for a Loan: The Causal Effect of Sentiment on Credit Origination. SSRN Electronic Journal.

Al-dhamari, R., & Ku Ismail, K. N. (2015). Cash holdings, political connections, and earnings quality: Some evidence from Malaysia. International Journal of Managerial Finance, 11(2), 215–231.

Amri, M. (2017). Pengaruh Kompensasi Manajemen Terhadap Penghindaran Pajak Dengan Moderasi Diversifikasi Gender Direksi Dan Preferensi Risiko Eksekutif Perusahaan Di Indonesia. Jurnal ASET (Akuntansi Riset), 9(1), 1–14.

Ardillah, K., & Prasetyo C, A. (2021). Executive Compensation , Executive Character , Audit Committee , and Audit Quality on Tax Avoidance. Jurnal Ilmu Akuntansi, 14(September), 169–186.

Armadiyanti, P., & Iswati, S. (2019). Corporate Political Connection And Audit Quality. Jurnal Akuntansi Dan Keuangan Indonesia, 16(2), 122–140.

Armstrong, C. S., Blouin, J. L., Jagolinzer, A. D., & Larcker, D. F. (2015). Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), 1–17.

Armstrong, C. S., Blouin, J. L., & Larcker, D. F. (2012). The incentives for tax planning. Journal of Accounting and Economics, 53(1–2), 391–411.

Butje, S., & Tjondro, E. (2014). Pengaruh Karakteristik Eksekutif dan Koneksi Politik Terhadap Tax Avoidance. Tax & Accounting Review, 4(1), 1–9.

Chaney, P. K., Faccio, M., & Parsley, D. (2011). The quality of accounting information in politically connected firms. Journal of Accounting and Economics, 51(1–2), 58–76.

Chee, S., Choi, W., & Shin, J. E. (2017). The non-linear relationship between CEO compensation incentives and corporate tax avoidance. Journal of Applied Business Research, 33(3), 439–450.

Chen, S., Chen, X., Cheng, Q., & Shevlin, T. (2010). Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95(1), 41–61.

Christensen, D., Gleason, C., Hanlon, M., Hines, J., Simone, L. De, Thornock, J., Weaver, C., & Wilson, R. (2016). Public Pressure and Corporate Tax Behavior. Journal of Accounting Research, 54(1), 147–186.

Chung, R., Firth, M., & Kim, J. B. (2005). Earnings management, surplus free cash flow, and external monitoring. Journal of Business Research, 58(6), 766–776.

Cook, K. A., Moser, W. J., & Omer, T. C. (2017). Tax Avoidance and Ex Ante Cost of Capital. Journal of Busoness Finance & Accounting, 44(7–8), 1109–1136.

DeAngelo, H., & W Masulis, R. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8(1), 3–29.

Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145–179.

Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2008). Long-run corporate tax avoidance. Accounting Review, 83(1), 61–82.

Faccio, M., Dinç, S., Djankov, S., Fisman, R., Giannetti, M., Green, R., Gresik, T., Kim, E. H., Lasfer, M., Masulis, R., Mauro, P., Mcconnell, J., Mitton, T., Morck, R., Parsley, D., Rose-Ackerman, S., Schultz, P., Shleifer, A., & Stolin, D. (2010). Differences between politically connected and nonconnected firms: A cross‐country analysis. Financial Management, 39(3), 905–928.

Fan, J. P. H., Wong, T. J., & Zhang, T. (2007). Politically connected CEOs, corporate governance, and Post-IPO performance of China’s newly partially privatized firms. Journal of Financial Economics, 84(2), 330–357.

Francis, B. B., Hasan, I., Sun, X., & Wu, Q. (2016). CEO political preference and corporate tax sheltering. Journal of Corporate Finance, 38, 37–53.

Francis, B. B., Hasan, I., Sun, X., & Wu, Q. (2019). CEO political preference and corporate tax sheltering. Finance Research Letters, 28, 370–375.

Frank, M. margaret, Lynch, L. J., & Rego, S. O. (2009). Tax reporting aggressiveness and its relation financial reporting University of Virginia. Accounting Review, 84(2), 467–496.

Gaaya, S., Lakhal, N., & Lakhal, F. (2017). Does family ownership reduce corporate tax avoidance? The moderating effect of audit quality. Managerial Auditing Journal, 32(7), 731–744.

Gallemore, J., Maydew, E. L., & Thornock, J. R. (2014). The Reputational Costs of Tax Avoidance. Contemporary Accounting Research, 31(4), 1103–1133.

Guenther, D. A., Matsunaga, S. R., & Williams, B. M. (2017). Is tax avoidance related to firm risk? Accounting Review, 92(1), 115–136.

Habib, A., Muhammadi, A. H., & Jiang, H. (2017). Political connections, related party transactions, and auditor choice: Evidence from Indonesia. Journal of Contemporary Accounting and Economics, 13(1), 1–19.

Halioui, K., Neifar, S., & Abdelaziz, F. Ben. (2016). Corporate governance, CEO compensation and tax aggressiveness: Evidence from American firms listed on the NASDAQ 100. Review of Accounting and Finance, 15(4), 445–462.

Hanafi, U., & Harto, P. (2014). Analisis pengaruh kompensasi eksekutif, kepemilikan saham eksekutif dan preferensi risiko eksekutif terhadap penghindaran pajak perusahaan. Diponegoro Journal of Accounting, 3(2), 1162–1172.

Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2–3), 127–178.

Hanlon, M., & Slemrod, J. (2009). What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement. Journal of Public Economics, 93(1–2), 126–141.

Hardianti, E. P. (2014). Analisis Tindakan Penghindaran Pajak Pada Perusahaan Yang Mempunyai Koneksi Politik. Jurnal Mahasiswa Teknologi Pendidikan, 3(1), 1–25.

Hashmi, M. A., Brahmana, R. K., & Lau, E. (2018). Political connections, family firms and earnings quality. Management Research Review, 41(4), 414–432.

Houston, J. F., Jiang, L., Lin, C., & Ma, Y. (2014). Political connections and the cost of bank loans. Journal of Accounting Research, 52(1), 193–243.

Ikhsani, K. T. W., & Adhikara, M. A. (2022). The Effect of Debt, Liquidity and Corporate Tax Policy on Dividend Policy with Profitability as Intervening Variables in Trading Companies Listed on the Indonesia Stock Exchange for the 2014-2019. International Journal of Current Science Research and Review, 05(02), 468–480.

Iswari, P., Sudaryono, E. A., & Widarjo, W. (2019). Political connection and tax aggressiveness: A study on the state-owned enterprises registered in Indonesia stock exchange. Journal of International Studies, 12(1), 79–92.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm : Managerial behavior , agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

Jian, M., Li, W., & Zhang, H. (2012). How does state ownership affect tax avoidance? Evidence from China. In School of Accountancy:Singapore Management University.

Jihene, F., & Moez, D. (2019). International Journal of Economics and Financial Issues The Moderating Effect of Audit Quality on CEO Compensation and Tax Avoidance: Evidence from Tunisian Context. International Journal of Economics and Financial Issues, 9(1), 131–139.

Junaidi, R. R., & Siregar, S. V. (2020). The effect of political connection and earnings management on management compensation. International Journal of Business and Globalisation, 26(1–2), 92–118.

Kanagaretnam, K., Lee, J., Lim, C. Y., & Lobo, G. J. (2016). Relation between auditor quality and tax aggressiveness: Implications of cross-country institutional differences. Auditing, 35(4), 105–135.

Kiesewetter, D., & Manthey, J. (2017). The Relationship between Corporate Governance and Tax Avoidance – Evidence from Germany using a Regression Discontinuity Design.

Kim, C., & Zhang, L. (2016). Corporate Political Connections and Tax Aggressiveness. Contemporary Accounting Research, 33(1), 78–114.

Langli, J. C., & Willekens, M. (2017). Tax Avoidance , Horizontal Agency Conflicts and High-Quality Auditing in Private Firms. Scandinavian Accounting Research Conference.

Lanis, R., & Richardson, G. (2011). The effect of board of director composition on corporate tax aggressiveness. Journal of Accounting and Public Policy, 30(1), 50–70.

Lestari, G. A. W., & Putri, I. G. A. M. A. D. (2017). Pengaruh Corporate Governance, Koneksi Politik, Dan Leverage Terhadap Penghindaran Pajak. E-Jurnal Akuntansi Universitas Udayana, 18(3), 2028–2054.

Li, C., Wang, Y., Wu, L., & Xiao, J. Z. (2016). Political connections and tax-induced earnings management: evidence from China. European Journal of Finance, 22(4–6), 413–431.

Lin, S., Tong, N., & Tucker, A. L. (2014). Corporate tax aggression and debt. Journal of Banking and Finance, 40(1), 227–241.

Malinda, K. P., Sintha, L., Munandar, A., & Bertuah, E. (2022). The Influence of Political Connections , and Good Corporate Governanceon Tax Aggressiveness. American International Journal of Business Management (AIJBM), 5(04), 106–110.

Mawarti, W., Negoro, D. A., & Syah, T. Y. R. (2022). The Effect of Financial Ratio in Determining Company Value:(Empirical Study on Banking Companies Listed on the Indonesia Stock Exchange for the 2015-2019 Period). Budapest International Research and Critics Institute (BIRCI-Journal): Humanities and Social Sciences, 5(1), 3001–3013.

Milyo, J., Primo, D., & Groseclose, T. (2000). Corporate PAC Campaign Contributions in Perspective. Business and Politics, 2(1), 75–88.

Minnick, K., & Noga, T. (2010). Do corporate governance characteristics influence tax management? Journal of Corporate Finance, 16(5), 703–718.

Mulia, R. P., Helmy, H., & Setiawan, M. A. (2019). Equity Risk Incentives dan Corporate Tax Aggresiveness. Wahana Riset Akuntansi, 7(1), 1437.

Narayanaswamy, R. (2013). Political Connections and Earnings Quality: Evidence from India. IIM Bangalore Research Paper, 433, 1–21.

Nugroho, A. P. (2019). The Effect of Corporate Political Connections on Tax Aggressiveness: Evidence in Indonesia. Journal of Applied Accounting and Taxation, 4(2), 138–143.

Ohnuma, H. (2014). Does executive compensation reflect equity risk incentives and corporate tax avoidance? a Japanese perspective. Corporate Ownership and Control, 11(2 A), 60–71.

Pilos, N. Van Der. (2017). Tax Avoidance and Corporate Governance (Issue August 2017).

Pranoto, B. A., & Widagdo, A. K. (2016). Pengaruh Koneksi Politik dan Corporate Governance Terhadap Tax Agressiveness. Seminar Nasional The 3rd Call for Syariah Paper, 1(3), 472–486.

Prasetya Margono, F., & Gantino, R. (2021). Influence of Firm Size, Leverage, Profitability, and Dividend Policy on Firm Value of Companies in Indonesia Stock Exchange. Copernican Journal of Finance & Accounting, 10(2), 45–61.

Rego, S. O., & Wilson, R. (2012). Equity Risk Incentives and Corporate Tax Aggressiveness. Journal of Accounting Research, 50(3), 775–810.

Richardson, G., Taylor, G., & Lanis, R. (2013). The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), 68–88.

Rodríguez, G. C., Espejo, C. A. D., & Cabrera, R. V. (2007). Incentives management during privatization: An agency perspective. Journal of Management Studies, 44(4), 536–560.

Shleifer, A., & Vishny, R. W. (1997). A Survey of Corporate Governance. The Journal of Finance, 52(2), 737–783.

Silaban, A. C., & Purba, H. (2020). The Effect Of Corporate Social Responsibility Disclosure and Corporate Governance on Tax Avoidance (Empirical Study of Property, Real Estate, and Building Construction Companies that Go Public in Kompas 100 Index 2013-2018). EPRA International Journal of Multidisciplinary Research (IJMR), 7838(October), 23–34.

Tandiono, M. R., & Santosa, S. (2021). The Influence of Executive Compensation and Executive Shares Ownership towards Corporate Tax Avoidance Abstrak. Journal of Applied Accounting and Finanace, 5(1), 49–58.

Yuwono, F. (2019). Pengaruh Corporate Governance Dan Kompensasi Eksekutif Terhadap Agresivitas Pajak. Diponegoro Journal of Accounting, 8(3), 1–12.