The Influence of Tax Avoidance and Profitability on Firm Value with Environmental, Social, and Governance Ratings as a Moderating Variable

Abstract

Corporate focus has shifted from mere profit generation to integrating sustainability, yet aggressive tax planning remains a controversial practice that challenges corporate social contracts and market valuation. This study aims to investigate the direct impacts of tax avoidance and profitability on firm value, while explicitly examining the moderating role of environmental, social, and governance ratings in these relationships. Employing a quantitative approach, this research analyzes unbalanced panel data from non-financial companies listed on the national stock exchange over a three-year observation period, utilizing moderated regression analysis for hypothesis testing. The empirical findings reveal that tax avoidance does not significantly affect firm value, whereas profitability demonstrates a strong positive impact. Furthermore, environmental, social, and governance ratings fail to moderate either relationship, indicating that environmental, social, and governance ratings do not function as a reputational buffer against tax controversies or as a valuation enhancer for already highly profitable firms. This study contributes to the existing literature by highlighting the phenomenon of cognitive compartmentalization and the overinvestment hypothesis in emerging markets, where investors prioritize pragmatic economic returns over moral legitimacy. The findings suggest that policymakers must mandate stricter, integrated regulations linking fiscal compliance with environmental, social, and governance performance evaluation, as voluntary disclosures currently fail to influence the pragmatic behavior of capital market participants.

Keywords: Environmental, Social, and Governance Ratings; Firm Value; Legitimacy Theory; Profitability; Tax Avoidance.