Managerial Ability and Tax Planning: Trade-Off between Tax and Nontax Costs

This study aims to investigate the effects of managerial ability (MA) on the trade-off between tax and nontax costs in the sustainability perspectives of firms. An effective tax planning for corporate sustainability is to consider tax and financial reporting costs at the same time and find the optimal cost balance that exists between these two costs. MA is measured by the data envelopment analysis (DEA) frontier and Tobit regression model. DEA frontier methods can be measured by capturing the changes in market value, excluding the characteristics of firms, which are beyond management control. The interest variables of this study are tax costs, nontax costs, and the trade-off between them. This study has three main findings. First, a significantly positive relationship exists between MA and the tax cost variable. Second, a significantly negative relationship exists between MA and the nontax cost variable. Third, MA has a negative relation with the trade-off between tax and nontax costs. Therefore, this study is the first to analyze the relationship between MA and the trade-off between tax and nontax costs. This study implies that a manager should consider the trade-off between tax and nontax costs to improve the firm’s value as MA is reflected by tax and financial reporting simultaneously.