Does ESG Disclosure Matter for the Tax Avoidance–Firm Value Relationship? Evidence from an Emerging Market

Abstract

This study examined the impact of tax avoidance on firm value. Further, it investigated whether ESG disclosure moderates this relationship. This study examined the top 100 non-financial firms listed in the S&P/EGX ESG index over the period from 2018 to 2022. The sample contained 80 companies with 400 firm-year observations. Statistical analysis was conducted using pooled ordinary least squares (OLS) and fixed effects regression models. The statistical analysis revealed a negative and significant impact of tax avoidance on firm value. Further, ESG disclosure was found to have a negative moderating impact as it eliminated the negative impact of the effect of tax avoidance on firm value, leading to a positive overall effect. These results carry important implications for regulators, investors, and shareholders in Egypt and other emerging markets, underscoring ESG disclosure’s pivotal role in enhancing firm value and reducing tax avoidance practices within the Egyptian market. To the best of our knowledge, this study represents one of the earliest empirical explorations into the moderating effect of ESG disclosure on the relationship between tax avoidance and firm value in an emerging market. By presenting empirical evidence from the Egyptian market, this research broadens the existing literature on tax avoidance and firm value, offering fresh perspectives on the influence of ESG disclosure. Early studies have primarily focused on the direct effect of ESG disclosure on firm value.

1. Introduction

With the increased proliferation of multinational corporations and the incidence of tax avoidance (TA) and evasion, governments around the world make continuous changes to their tax strategies to face such behavior [1]. These changes are necessary to secure the amount of taxes needed to support governments in performing their duties. On the other hand, corporations see taxes as a significant cost that they should pay continuously due to the regulations, and if they can reduce this burden legally, this will increase their opportunities in the market. Having said this, TA is one of the strategies adopted by companies to reduce the tax rate they actually pay, rather than the one stated by the government [2,3].

TA as a practice is seen differently in the literature. Some studies suggest that TA strategies should maximize shareholders’ wealth by keeping more resources inside the company rather than paying them in terms of taxes [1], while others warn that this behavior, if managed poorly, can lead to higher agency costs and may lead to a reduction in shareholders’ wealth. Supporters of the latter opinion always explain this from an agency theory perspective [4]. Hence, companies should make a tradeoff between tax burden and maximizing profits, as having such a balance will lead to an increase in shareholders’ wealth [5].

These contradictory views regarding the role that TA plays in companies’ and shareholders’ wealth have led to extensive research in the literature exploring the impact of TA on firm value (FV) [1,6]. These studies reported mixed results, as some studies found that TA increased FV, while others reported reduced FV due to increased agency costs and less transparency, which are issues related to sustainably in the long run [7,8]. Having said this, how TA impacts FV remains unknown, and further research is needed to understand the underlying drivers and mechanisms [1,4,9].

One of the main mechanisms that started to appear recently in the literature is sustainability performance and its impact on irresponsible activities like TA by firms [4,10,11,12]. This growing body of research has reported mixed results, leaving the impact of sustainability performance an unresolved issue [12]. For example, some studies reported that proper sustainability initiatives should entail ethical behavior to reduce TA activities [4,10]. However, other studies reported the opposite, as companies that engaged in CSR and sustainability initiatives used those activities to mask their unethical behavior and give the impression that they are responsible companies [13,14].

It is now apparent that the literature includes contradictory results regarding the impact of TA on FV. The literature also reports inconclusive results regarding the joint role of sustainability performance and TA and their impact on FV, which represents a research gap that pleads for more exploration. Hence, the current study explores the direct effect of TA on FV, along with the moderating impact of ESG disclosure on this relationship. In that sense, the current exploration extends and adds to the literature, as most of the studies found in the literature deployed a holistic approach by studying the impact of TA on different regions, like Europe, except for ref. [4], who studied the impact of TA on FV with the concentration of ESG scores as a moderator in the French context. We extend and add to this by exploring a blind spot in the current research, namely, by exploring one of the emerging markets, i.e., Egypt, which is unexplored in the literature.

Focusing on the Egyptian context represents one of the key aspects of this paper since most studies have been carried out in developed markets, which have different contextual implications compared to developing countries like Egypt. Arab nations, including Egypt, present a unique environment for further exploration due to various social, political, and economic reforms stemming from recent revolutionary movements [15,16,17,18,19]. Since the 1990s, Egypt has embarked on economic and market reforms. These initiatives encompassed privatization, cost-cutting in public spending, governance enhancement, advancement in sustainability reporting and performance, and the empowerment of women [15,20,21,22]. These changes were implemented based on recommendations from Western partners of the Egyptian government, aimed at strengthening the role of the private sector in enhancing the Egyptian economy. Nevertheless, amid regulatory changes and economic restructuring initiatives, Egypt experienced two revolutions. These revolutionary events had a significant impact on the abovementioned reforms [23]. The revolutionary passion resulted in political turmoil and economic uncertainty, instilling concerns about investing in the Egyptian market. The spread of this fear became a driver for regulators, shareholders, companies, and investors [15,24].

These uncertainties and anxieties prompted the Egyptian government to introduce a range of reforms designed to ease concerns and tensions within both the market and the nation. The needed restructuring encompassed the introduction of new regulations to safeguard workers, empower women, enhance tax laws, and strengthen the governance framework [14,15,17,18,25]. In an attempt to enhance tax laws, in 2015, the Egyptian government made significant changes to the tax environment by issuing the Unified Tax Law. This fresh legislation brought various adjustments to the tax system in Egypt [26]. One notable alteration was a reduction in the corporate income tax rate for small- and medium-sized firms with an annual turnover below EGP 5 million to 1%, while larger companies maintained a 20% tax rate. Furthermore, a simplified tax structure was implemented for smaller firms’ earnings, enabling them only 1% on their total revenues [27].

More recently, and due to many economic reforms that included currency floating, Egypt has introduced a self-assessment system where taxpayers are tasked with evaluating their tax responsibilities based on the current tax legislation [28]. Despite attempts to streamline the tax system in Egypt, many businesses continue to struggle with adhering to tax regulations [26]. The intricacy and ambiguity of tax laws, coupled with the restricted availability of financial and tax advisory services, add to the challenges that small firms encounter in fulfilling their tax duties [29].

Regarding the current status of the Egyptian market, there is still much ground to cover in terms of growth, deregulation, and international integration, as without these elements, the market cannot be reasonably compared to the US or UK markets [23,30]. Moreover, considering the diverse accounting practices in place, Egypt still faces significant challenges, chiefly due to structural barriers like government interventions that impede widespread adoption [17,18,23]. An all too common scenario in many developing economies, including Egypt, involves the lack of robust regulatory frameworks, the intertwining of politics with business entities leading to ineffective oversight, limited transparency and disclosure, and weak governance [16,20,21].

Considering these intricate factors, Egypt presents an intriguing context for examining the correlation between TA and FV, especially when adding the moderating impact of ESG disclosure. This research aims to assess whether the developing regulatory, governance, tax regulations, and accounting structures in Egypt have had a significant impact on enhancing FV. Specifically, this study asks two central questions: (1) What is the impact of TA on FV? (2) How does ESG disclosure influence the TA-FV relationship? The study results revealed a negative and significant impact of TA on FV. Further, ESG disclosure was found to have negatively moderated the impact as it eliminated the negative impact of the effect of TA on FV, leading to a positive overall effect. Hence, the current study provides additional evidence that ESG disclosure represents one of the main factors that affect FV in the Egyptian context.

In this regard, the present study contributes and adds value to the literature in multiple aspects. Firstly, it delves into the moderating influence of ESG disclosure within a developing context undergoing significant regulatory transformations and economic and political unrest, which affect governance, sustainability, and tax regulations. Secondly, in contrast to early studies in the literature, our research stands out by utilizing agency, signaling, and stakeholder theories as a strong theoretical foundation to formulate the study hypotheses and elucidate the findings. Thirdly, it explores the effects of ESG disclosure within an economy that is recovering from revolutionary movements. Lastly, this study’s discoveries and ramifications will attract attention from Egyptian businesses, local market investors, and regulatory authorities in developing economies, especially Arab countries that have undergone political and economic turmoil like the Egyptian context.

This paper is structured as follows: Section 2 offers insight into the literature review, theoretical frameworks, and hypothesis formulation. Section 3 elaborates on the methodology and approaches utilized. Section 4 showcases the empirical findings and associated discussions. Section 5 delineates the robustness analysis. Lastly, the concluding section summarizes the main findings, implications, and directions for future research.

2. Literature Review

2.1. Tax Avoidance and Firm Value

When a company partakes in tax planning strategies to minimize tax liabilities, it undertakes a thorough assessment, weighing the costs and benefits involved [1]. The strategic tax planning approach offers advantages, such as potential tax savings, reducing burdens on the company due to tax expense, and enabling greater fund allocation flexibility, ultimately contributing to an enhancement in FV [31]. Extensive research has focused on exploring the realm of corporate TA, with a primary aim of influencing the dynamics of FV. The existing literature on the correlation between TA and FV presents varied findings. While it is commonly acknowledged that TA can add value to a company, certain factors may have a negative impact on this association [1,4,5,10,31].

As per ref. [32], conflicts of interest can emerge in companies when managers divert unpaid taxes for their own benefit, reducing actual profits for the company and its shareholders. Managers may exploit opportunities and shift resources through TA practices [33]. In addition, ref. [34] argued that managerial self-interest negatively impacts FV. The cost of capital is highlighted as a significant aspect associated with the adverse effects of TA on FV; ref. [35] explained that bond yields tend to be higher for tax-avoidant firms, particularly those facing a heightened risk of IRS audits. Ref. [36] demonstrated a positive correlation between bank loan spreads and TA, leading lenders to implement stricter loan terms. Banks often lack mechanisms to assess firms’ integrity and risk appetite, relying instead on transparency, akin to analysts and investors. Moreover, ref. [37] revealed that companies engaging in TA practices may face increased equity costs, especially firms with inadequate external oversight and limited information disclosure, which could exacerbate their challenges.

Accordingly, lenders appear to link TA with activities that generate risk, leading them to demand higher interest rates for their loans. Intriguingly, many family-owned businesses often reduce external oversight and the presence of board independence to better align their companies’ goals and actions with their own vision. Ref. [38] and ref. [34] supported the notion that TA can enable managerial diversion through complexity and limited transparency, manifested in earnings manipulation, transactions structuring, and a deficiency in thorough disclosures. Some studies also examined the market’s response to TA. For example, ref. [39] investigated the impact of TA news on companies’ stock prices, observing a decrease in share prices, as the market interprets TA activities negatively. Although there is a reaction in stock prices, it is relatively minor compared to responses to accounting incidents. Ref. [11] reached a similar conclusion, finding that news about corporate TA can initially cause stock prices to drop swiftly; however, they tend to recover shortly after, indicating that market reactions are typically transient.

Guided by stakeholder theory, companies grapple with a myriad of responsibilities toward various stakeholders, encompassing shareholders and governmental entities [40,41]. Among the crucial obligations within the literature is tax compliance, which is recognized as one of the main factors for societal well-being [40,42]. However, the straightforward view of this responsibility begins to shift when considering the complexities of government efficiency in allocating tax funds. The significance of tax compliance is questioned when governments appear to misallocate it, prioritizing self-interest over broader societal advancement. At that point, companies may realize that their financial contributions could generate greater societal benefits if directed toward internally driven CSR initiatives [43]. This re-evaluation becomes more significant when companies view government tax allocations as unfairly benefiting certain groups while neglecting the wider societal implications. As a result, government financial practices could steer companies towards technical analysis, not just as a financial strategy, but to autonomously guide their ESG initiatives.

The existing research provides many insights regarding different tax strategies and their impact on FV [31,44,45,46,47,48,49]. Ref. [48] investigated the convergence of technical analysis, financialization, and short-sighted managerial perspectives, indicating that brief managerial horizons could worsen financial tactics. Similarly, ref. [47] highlighted the pivotal role of managerial competency in shaping both TA practices and firm valuation. Taking a broader perspective, ref. [46] underscored the interplay among intellectual capital, board interactions, and the generation of value. In addition, ref. [31] offered insights, from a Tunisian standpoint, on the relationship between tax risk and FV. In the Iranian setting, numerous studies scrutinized the intricacies of tax aggressiveness, debt management, and managerial expertise, frequently utilizing classical and Bayesian econometrics techniques [44,45]. Lastly, ref. [49] shed light on the UK context, connecting CSR with tax strategies, along with capital structure. Together, this body of literature presents diverse viewpoints on the factors shaping corporate tax behaviors and their consequences.

The empirical terrain exploring the relationship between TA and FV reveals conflicting viewpoints. Some studies suggested a positive link between TA and FV, as a reduction in tax liabilities can boost shareholders’ wealth, particularly in companies with effective corporate social governance [50]. Conversely, if shareholders view TA as posing a threat to the company’s long-term sustainability, it may be associated with a decrease in a firm’s value [51]. Additionally, research by ref. [39] indicated a negative correlation between TA and FV due to reduced transparency in reporting, leading to an increased risk of market price decline [10,38,52]. Having said this, we propose the following hypothesis.

H1. 

A negative association exists between tax avoidance and firm value.

2.2. ESG Disclosure Moderating Role

Theoretically, the negative impact of TA on FV can be reduced through sustainability reporting in two distinct ways. Firstly, sustainability-related disclosure indicates that firms have ethics and conscientious sustainability reporting and invest significant resources in producing these reports [53,54,55,56]. Consequently, firms are unlikely to produce sustainability reports unless they are confident in the effectiveness of their sustainability initiatives [57,58,59,60,61,62]. Moreover, according to signaling theory, the societal pressure on companies that fail to transparently disclose their sustainability efforts acts as a major deterrent [63,64]. Therefore, companies with weaker sustainability performance are less inclined to participate in sustainability reporting by implementing comprehensive sustainability measures.

Moreover, sustainability reporting demonstrates that firms with outstanding sustainability practices must document these initiatives in voluntary reports. Superior sustainability performance also reflects positively on a company’s ethical standards [65,66,67,68,69,70]. Conversely, TA raises ethical concerns as it impacts government tax revenue utilized for societal welfare. Consequently, firms may engage in TA, expecting that voluntarily producing sustainability reports will counteract the negative perception of their TA practices. This rationale is supported by ref. [71], who reported that governmental companies are less effective than private enterprises in enhancing societal welfare.

Secondly, recent studies on ESG reported that responsible actions are instrumental in reducing TA. Furthermore, shareholders perceive that TA results from irresponsible behavior, which reflects poorly on a company’s ethics [33,39,72]. TA is inherently viewed negatively by shareholders as it impacts a company’s reputation and may have tax risks [11,12]. Nonetheless, businesses have alternative strategies, such as sustainability measures, to enhance societal well-being. Shareholders are likely to approve of a company’s TA if they know that the saved funds are directed towards sustainability initiatives.

Conversely, as posited by ref. [71], ESG disclosure serves as the most extensive type of CSR reporting. Aligned with agency theory, these reports help bridge information between management and stakeholders. Through these disclosures, companies can convey to investors that resources saved through technical analysis are invested in sustainability initiatives. Additionally, disclosing more information about the origins of TA can alter shareholders’ perceptions of a company’s tax practices. Indeed, ref. [73] argue that transparency diminishes negative views of TA among shareholders. Economic theory advocates that managers should utilize legal means to minimize tax payments [74], with sustainability initiatives being valuable in increasing shareholder wealth [75].

Finally, although the literature includes several studies that concentrated on the positive impact of ESG disclosure and sustainability initiatives on FV, none of these studies concentrated on this relationship in the Egyptian context. Moreover, little is known regarding the moderating impact of ESG disclosure on the TA-FV relationship, which represents a research gap that needs further exploration. Hence, the current study explores the direct effect of TA on FV, along with the moderating impact of ESG disclosure on this relationship. In that sense, the current exploration extends and adds to the literature, as most of the studies in the literature deployed a holistic approach by studying the impact of TA on different regions, like Europe, except for ref. [4], who studied the impact of TA on FV with the concentration of ESG scores as a moderator in the French context. We extend and add to this by exploring a blind spot in the current research, namely, by exploring one of the emerging markets, i.e., Egypt, which is unexplored in the literature. Based on the above discussion, we propose the following hypothesis.

H2. 

ESG moderates the association between tax avoidance and firm value.

3. Research Design

3.1. Data Description

The original sample for this study comprised the leading companies from the EGX 100 index listed on the Egyptian Exchange. Specifically, only companies included in the S&P/EGX ESG index for a continuous five-year period, from 2018 to the conclusion of 2022, were selected for the sample. It is noteworthy that the index has featured the top 30 corporations in Egypt since 2007. This is because they have outperformed other companies in the three ESG areas [17,76]. Financial and insurance companies were not included because of their special accounting and financial reporting characteristics, nor were any firms that lacked data, since they did not employ ESG ratings. Eighty companies produced 400 observations in the final sample, as shown in

Table 1. Sample structure.

Sector	No. of Companies	No. of Observations	%
Contracting and Construction Engineering	10	50	12.5
Trade and Distributors	4	20	5
Paper and Packaging	4	20	5
Travel and Leisure	6	30	7.5
IT, Media, and Communication Services	4	20	5
Basic Resources	6	30	7.5
Textile and Durables	6	30	7.5
Real Estate	11	55	13.7
Healthcare and Pharmaceuticals	4	20	5
Food, Beverages, and Tobacco	12	60	15
Building Materials	8	40	10
Industrial Goods, Services, and Automobiles	5	25	6.3
Total	80	400	100

. The information utilized in this study came from Bloomberg Asharq, Mubasher Egypt, annual reports, and corporate websites.

3.2. Definition of Variables

3.2.1. The Dependent Variable: Firm Value

Drawing from previous studies by ref. [71,77], we gauged a firm’s value using Tobin’s Q. Many researchers have utilized this indicator as a rough estimate of business value [78]. According to ref. [77], Tobin’s Q is computed as the book value of liabilities plus the equity market value, scaled by the book value of assets. The more growth potential and investment possibilities a company has, the greater its Tobin’s Q value.

3.2.2. The Independent Variable: Tax Avoidance

Based on earlier research, the effective tax rate (ETR) was used to measure TA [9,79]. In academic research, ETR is often utilized as a dependable substitute for pinpointing cases of tax avoidance [79,80]. Our definition of TA, in accordance with earlier research [81,82], encompassed activities that reduce a company’s tax obligations in comparison to its accounting revenue before taxes. The ETR was thus determined by scaled tax costs by pretax income. The ETR was multiplied by (−1) to produce an increasing measure of TA, as a greater ETR denotes less tax aggression [83].

3.2.3. The Moderating Variable: ESG Disclosure

ESG ratings were used to assess ESG disclosure. Numerous research studies carried out in the Egyptian context have made use of it since it is more stable and relevant to societal demands [76,82]. The annual evaluations aim to enhance disclosure and transparency, elevate Egyptian reporting standards, and offer investors CSR efficiency benchmarks. Based on their latest filings, news, and other pertinent information available to the public, companies receive an annual composite score in this rating system. They also undergo a mid-year assessment. This score comprises environmental, social, and governance factors. The governance aspect was adapted from Standard and Globe’s corporate governance model, while the social and environmental aspects were determined based on the alignment with GRI, global compact, and sustainable development objectives. Each firm’s qualitative and quantitative scores were added together to create this composite score. From the pool of 100 Egyptian firms, the top 30 companies were then included in the ESG Index [84].

3.2.4. The Control Variables

We created a set of variables that may impact the value of a firm, including the type of auditor and the size of the firm, its profitability, its leverage, and its loss [4,77].

3.3. The Study Models

We investigated the association suggested by the study hypotheses using Pooled OLS and fixed effect (FE) regression analysis using robust standard errors to address worries about autocorrelation and heteroscedasticity. As a result, this study favored fixed effect models as the random effects estimator was rejected by the Hausman test. Consequently, two regression models were created to express the two hypotheses in the following manner:

Model 1:

Tobin’s q _it = β₀ + β₁ETR_it + β₂ ROA_it + β₃ Big4_it + β₄ Size_it + β₅ Lev_it + β₆ L_it + β_t + β_ind + ε_it

(1)

Model 2:

Tobin’s q _it = β₀ + β₁ETR_it + β₂ ESG_it + β₃ ETR × ESG_it + β₄ ROA_it + β₅ Big4_it + β₆ Size_it + β₇ Lev_it + β₈ L_it +β_t + β_ind + ε_it

(2)

where Tobin’s q measures business value, ETR measures tax avoidance, and ESG ratings assess ESG disclosure. Firm leverage is Lev, firm profitability is ROA, and firm size is Size. Big4 is an auditor type, and L is firm loss. Industry fixed effects are denoted by β_ind and time fixed effects by β_t. The definitions of each variable are given in

Table 2. Variable definitions.

Variable	Abbreviation	Measurement
Dependent variable
Firm value	Tobin’s q	(book value of all liabilities + Market value of equity) ÷ total book value of assets
Independent variable
Tax avoidance	ETR	Income tax as a percentage of pretax income.
Moderating variable
ESG disclosure	ESG	S&P works with the Egyptian Stock Exchange and credit rating agency CRISIL to provide the ESG ratings that are used to calculate the ESG disclosure.
Control variables
Auditor type	Big4	This variable is nominal since (1) denotes external auditors connected to global Big 4 audit firms and (0) denotes otherwise.
Company size	Size	The entire assets’ natural logarithm.
Firm leverage	Lev	total debt ÷ total assets
Firm profitability	ROA	Pretax income ÷ total assets
Firm loss	L	A nominal variable with a value of 1 if the business incurred losses this year and 0 otherwise.

.

4. Regression Results

4.1. Descriptive Analysis and Correlation

Examining the results,

Table 3. Descriptive statistics.

Variables	N	Minimum	Maximum	Mean	Median	Std. Deviation
Tobin’s q	400	0.09	5.69	1.23	0.95	0.93
ETR	400	−3.52	−0.02	−0.13	−0.06	0.34
ESG	400	0.43	1.00	0.58	0.53	0.15
ROA	400	−0.48	0.45	0.05	0.04	0.11
Big4	400	0.00	1.00	0.37	0.00	0.48
Size	400	16.07	24.90	20.37	20.60	1.76
Lev	400	0.00	0.92	0.38	0.37	0.23
L	400	0.00	1.00	0.24	0.00	0.43

Note: The definitions for all the variables can be found in Table 3.

provides the descriptive statistics. Notably, Tobin’s q spans from 0.09 to 5.69, with an average (median) of 1.32 (0.95). Furthermore, ETR indicates that the average company TA is around 0.13. ESG disclosure spans from 0 to 1, with a median (average) of 0.58 (0.53). The log transformation varies from 16.07 to 24.90 and averages 20.37 for firm size. The average leverage is 0.38. The company’s profitability averages 5%. Out of the 96 observations (400 × 24%) in the sample, the average firm loss is 24%. According to 148 observations (400 × 37%), the average auditor type for the total sample is 37%.

Table 4. Correlation.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	VIF
(1) Tobin’s q	1								-----
(2) ETR	−0.222 ***	1							1.08
(3) ESG	0.150 ***	−0.242 ***	1						1.07
(4) ROA	0.202 ***	−0.046	0.061	1					1.70
(5) Big4	0.213 ***	−0.100 **	0.024	0.053	1				1.43
(6) Size	0.225 ***	−0.098 **	0.018	0.217 ***	0.337 ***	1			1.55
(7) Lev	0.189 ***	0.013	0.067	−0.115 **	0.235 ***	0.273 ***	1		1.14
(8) L	0.003	0.074	−0.050	−0.466 ***	−0.006	−0.119 **	0.100 **	1	1.62
Mean VIF									1.37

Note: ***, and ** denote that the correlation is significant at the 1, and 5 percent levels.

displays the correlation matrix between the variables in the models that were evaluated. It demonstrates that Tobin’s q and each of the other variables in the model have a significant association. For instance, TA (ETR) and Tobin’s q have a significant negative association. Furthermore, Tobin’s q and ESG, ROA, Big4, Size, and Lev have a significant positive association. However, the strength of these interactions is not deemed excessive because the correlation coefficients between the independent and control variables are less than 0.80. Additionally, the Variation Inflation Factor (VIF), which quantifies the proportion of each independent variable’s variation that can be accounted for by all other variables, was employed to further demonstrate the lack of multicollinearity by performing a multicollinearity diagnostic. As a result,

Table 5. Regression results—Model (1).

Variables	DV: Tobin’s q—Model (1)
	Pooled OLS		FE
	Coef.	T-Test	Coef.	T-Test
Constant	−0.035	−0.066	−1.528 **	−2.09
ETR	−0.574 ***	-4.51	−0.519 ***	−4.00
ROA	2.715 ***	5.40	2.394 ***	4.32
Size	0.449 ***	3.56	0.301 **	2.25
Lev	0.673 ***	3.46	0.613 **	2.55
L	0.032	0.99	0.101	0.88
Big4	0.204 *	1.94	0.109 ***	2.83
Year (FE)	Included
Industry (FE)	Included
Adj. R2	0.179		0.201
F-statistic	14.269 ***		13.129 ***
Hausman test results	Fixed effects
Obs.	400		400

Note: *** p < 0.01, ** p < 0.05, and * p < 0.1.

suggests that the VIF is less than 10.

4.2. Multivariate Analyses

4.2.1. Tax Avoidance and Firm Value (Model 1)

The findings of the regression that looks at the connection between TA and FV using Model (1) are displayed in Table 5. Our analysis of the data indicates that there is a negative and significant link between TA and FV at the p < 0.01 level of significance. In particular, our regression results offer strong evidence in favor of the theory that TA significantly affects a firm’s worth. Therefore, we agree with Hypothesis 1. This supports early findings in the literature, which show that investors and shareholders adversely respond to a company’s TA since it raises agency costs [4,10,38,52]. However, the opposite is true for those who found a positive correlation between TA and FV [1,85,86], where investors view TA as an effective way to boost FV by reducing tax burdens and generating excess cash flows for shareholders.

4.2.2. ESG’s Moderating Role (Model 2)

The findings of the Pooled OLS and FE regressions that we employed to investigate the connections between TA, ESG, and business value are summarized in

Table 6. Regression results—Model (2).

Variables	DV: Tobin’s q—Model (2)
	Pooled OLS		FE
	Coef.	T-Test	Coef.	T-Test
Constant	−0.34	−0.56	−1.996 **	−2.65
ETR	−0.625 ***	−3.82	−0.545 ***	−3.28
ESG	0.515 *	1.76	0.959 **	2.41
ETR*ESG	0.672 ***	3.52	0.699 **	2.06
ROA	2.645 ***	5.26	2.327 ***	4.22
Size	0.031	1.02	0.106 **	2.77
Lev	0.651 ***	3.34	0.56 **	2.31
L	0.044	1.07	0.075	1.09
Big4	0.203 *	1.94	0.102	0.89
Year (FE)	Included
Industry (FE)	Included
Adj. R2	0.187		0.217
F-statistic	11.275 ***		10.809 ***
Hausman test results	Fixed effects
Obs.	400		400

Note: *** p < 0.01, ** p < 0.05, and* p < 0.1.

. Our investigation shows a significant and positive association between ESG and business value, as seen in the table. This implies that higher company values are linked to companies with stronger sustainability practices or higher ESG scores. This result is consistent with the current focus on sustainable business practices and the growing stakeholder demand that companies implement socially and ecologically responsible operations. This is consistent with [4,71,87].

The second hypothesis states that ESG influences the association between TA and a firm’s value. We accepted our Hypothesis H2, which states that the coefficient of the ETR*ESG variable is positive and significant at less than the 0.1% significance level. The regression results obtained using Model 2, as shown in Table 6, indicate that the interaction between TA and ESG (ETR*ESG) seems to have a positive effect on FV. This suggests that when considered in conjunction with a company’s ESG policies, the detrimental effect of TA on FV is mitigated. The interaction term’s positive coefficient suggests that environmental, social, and governance (ESG) practices often increase corporate value and reduce TA. The importance of the interaction term highlights how intricately tax practices, ESG, and their combined impact on business value are related. Therefore, in order to promote a positive image of moral conduct and enhance their public and media image, companies that participate in ESG disclosure would rather not engage in TA strategies. This result is consistent with many studies in the literature [4,87,88,89].

5. Robustness Analysis

5.1. Alternative Measures of Tax Avoidance

We estimated the book-to-tax differences (BTDs) as an alternate measure of TA, as outlined by ref. [90] and ref. [4], to guarantee the robustness of our baseline results. By dividing the difference between taxable income and the book value of income by lagged total assets, this indicator was computed. It draws attention to the disparity between taxable income and financial income that is not explained by structural factors, indicating the existence of tax shelter operations. Our findings are solid when employing different TA strategies, as

Table 7. Results of the alternate measurement TA (BTD).

Variables	DV: Tobin’s q
	Model (1)				Model (2)
	OLS		FE		OLS		FE
	Coef.	T-Test	Coef.	T-Test	Coef.	T-Test	Coef.	T-Test
Constant	−0.452	−0.78	−1.904 ***	−2.62	−0.616	−1.01	−1.246 ***	−2.99
BTD	−0.431 ***	−4.63	−0.396 ***	−4.18	−0.274 **	−2.14	−0.264 **	−2.04
ESG	-------	-------	-------	-------	0.498 *	1.81	0.883 **	2.24
BTD*ESG	-------	-------	-------	-------	0.747 ***	3.57	0.486 **	2.03
ROA	2.718 ***	5.42	2.395 ***	4.33	2.687 ***	5.37	2.324 ***	4.22
Size	0.445 ***	3.53	0.108 ***	2.82	0.033	1.09	0.109 ***	2.86
Lev	0.673 ***	3.46	0.62 ***	2.58	0.634 ***	3.27	0.53 **	2.20
L	0.033	0.99	0.098	0.85	0.109	1.37	0.101	0.89
Big4	0.204 *	1.94	0.298 ***	2.23	0.201 *	1.92	0.099	0.86
Year (FE)	Included
Industry (FE)	Included
Adj. R2	0.181		0.204		0.192		0.221
F-statistic	14.470 ***		13.411 ***		11.586 ***		10.977 ***
Obs.	400		400		400		400

Note: *** p < 0.01, ** p < 0.05, and * p < 0.1.

illustrates. Our key findings and assumptions are generally qualitatively supported by Models 1 and 2.

5.2. Two-Stage Dynamic Panel Data Estimator (GMM)

In this study, we looked at how different levels of TA and ESG activities affect a firm’s value. Due to endogeneity issues and to ensure the robustness of our empirical results, we used the GMM approach, which offers solutions to the problems of simultaneity bias, reverse causality, and omitted potential variables. Additionally, it enables the regulation of certain temporal and individual impacts and the removal of endogeneity biases [4]. We chose the system GMM approach because it makes use of internal instruments included in the panel data structure to enable reliable estimates. In order to assist in accounting for potential endogeneity biases, this strategy employs lagged dependent variables as explanatory factors. It also takes into consideration the existence of lagged independent variables, which is essential for identifying temporal dynamics and possible connection time delays.

Table 8. Results of the GMM approach.

Variables	DV: Tobin’s q
	Model (1)		Model (2)
	Coef.	T-Test	Coef.	T-Test
Constant	−0.338	−0.30	−0.429	−0.39
L.Tobin’s q	0.365 **	2.73	3.85 **	2.59
ETR	−0.297 **	−2.36	−0.626 **	−2.29
ESG	-------	-------	0.284 **	2.25
ETR*ESG	-------	-------	0.533 **	2.80
Controls	Included
Year (FE)	Included
Industry (FE)	Included
Chi2	321.40 ***		72.60 ***
AR2 (p-value)	0.156		0.210
Hansen test (p-value)	0.182		0.382

Note: *** p < 0.01, and ** p < 0.05.

displays the results of the system GMM regression.

The results in Table 8 imply that our conclusions remain valid even after taking any endogeneity issues into consideration. Additionally, the Hansen J test for over-identified constraints was employed to evaluate our instruments’ validity. According to the AR (2) p-values and a smaller number of instruments compared to the number of groups, the results confirm the instruments’ appropriateness and reliability. The combined GMM results support our initial findings and highlight the strong beneficial influence of ESG practices on the connection between TA and business value. When the omitted variable and reverse causality problems are taken into consideration, our findings essentially stay the same.

6. Discussion and Policy Recommendations

The primary empirical hypotheses of this study are largely supported by the empirical analysis above. Specifically, the analysis indicates (1) that tax avoidance and firm value are negatively correlated and (2) that ESG positively influences the correlation between TA and company value. The first hypothesis is supported by Table 5, while the second hypothesis is supported by Table 6.

The negative association between TA and FV findings is consistent with ref. [73]. The authors found that tax planning was inversely associated with business value in Chinese enterprises between 2001 and 2009. They pointed out that Chinese investors respond unfavorably to corporate tax avoidance since it raises agency costs. This unfavorable response might be minimized by increased information transparency. Also, ref. [91] investigated a similar issue with manufacturing businesses listed on the Indonesian Stock Exchange between 2014 and 2016. The empirical findings highlighted that tax avoidance has a detrimental impact on company value. The current study’s findings support the findings of many other studies in the literature, which show that investors and shareholders adversely respond to a company’s TA practices since it raises agency costs [4,10,38,52]. However, the opposite is true for those who find a positive correlation between TA and FV [31,85,86], where investors view TA as an effective way to boost FV by reducing tax burdens and generating excess cash flows for shareholders. In addition, the significant negative impact of the moderating variable is consistent with the current focus on sustainable business practices and the growing stakeholder demand that companies implement socially and ecologically responsible operations.

This study’s results are consistent with early studies in the literature [71,87]. Moreover, our results echo and confirm the results of ref. [4], who found the same impact of TA and ESG disclosure on FV in the French context. However, our results are different in terms of the strong impact of ESG disclosure, which eliminated the negative impact of the effect of TA on FV, leading to a positive overall effect. As reported in the study by ref. [4], the effect of the moderating impact was less powerful, while the same negative moderating impact was revealed: the negative impact of TA had a stronger effect on FV, leading to an overall negative impact. We argue that the difference in the negative moderating impact of ESG disclosure in the French context is due to the increased awareness of stakeholders that companies may be using these ESG disclosures to mask their TA practices. While in the Egyptian context, and due to the lack of awareness, ESG disclosures were perceived as improving ethical and responsible behavior, which led to a positive overall impact on FV.

Furthermore, the favorable impact of ESG on the relationship between tax avoidance and business value is consistent with stakeholder theory, which suggests that corporations should not engage in tax avoidance activities that may affect stakeholders and society as a whole. Similarly, the corporate culture theory proposes that corporations behave appropriately. According to these theories, companies with greater ESG will pay more taxes [92]. This suggests that greater ESG ratings or sustainability practices may lead to greater corporate values. This conclusion supports the growing desire of stakeholders for corporations to embrace environmentally friendly and socially responsible practices.

Given the data provided, this research holds substantial implications and policy recommendations for Egyptian corporations, regulatory bodies, and investors. It is suggested that Egyptian businesses place a high priority on enhancing their sustainability performance, with a specific emphasis on ESG disclosure and ratings, as these factors have been proven to enhance FV. Moreover, companies are advised to emphasize ethical behavior and reduce TA strategies, as these actions are perceived negatively by stakeholders and can diminish FV, signaling irresponsibility on the part of the company. Furthermore, this research provides valuable perspectives for Egyptian policymakers and regulators. The results emphasize the significance of reducing TA tactics and improving ESG disclosures to generate a favorable effect on FV. Hence, compliance monitoring by policymakers and regulators is needed for governance guidelines, tax laws, and the implementation of effective ESG disclosures. Lastly, investors are encouraged to consider our conclusions when deciding to invest in Egyptian companies. It is essential for investors to consider these aspects to make well-informed investment choices that align with sustainable practices and ethical conduct.

Finally, to improve corporate transparency, promote sustainability, and reduce the negative consequences of tax avoidance on company value, both governments and businesses must implement smart policy initiatives. Governments should impose stiffer penalties for active tax avoidance, as well as incentivize ESG-linked tax policies through tax breaks for companies that invest in sustainability. Furthermore, firms should incorporate ESG concepts into their business plans, ensuring that tax planning is consistent with sustainability objectives. This includes introducing voluntary tax transparency measures, connecting CEO remuneration to ESG performance, and reinvesting tax savings in social and environmental programs. Improving financial and non-financial reporting and implementing global sustainability standards can help to strengthen company governance and investor trust. By implementing these measures, governments and businesses may establish a more balanced tax system that encourages ethical business practices while also promoting long-term company value and the welfare of society.

7. Conclusions, Limitations, and Future Research

This study explored the interplay between TA, ESG disclosure, and FV among the top 100 non-financial companies listed in the S&P/EGX ESG index from 2018 to 2022. The sample consisted of 80 companies with 400 firm-year observations. Statistical analysis was carried out using pooled ordinary least squares (OLS) and fixed effects regression models. Two main conclusions from this study were supported by empirical findings. The first is that there is a strong negative correlation between tax avoidance and business value, indicating that aggressive tax methods may undermine investor confidence since investors view them negatively, owing to their consequences for transparency and agency costs. Second, this study discovered that this link is positively moderated by ESG disclosure, where strong ESG practices seem to improve market performance and stakeholder trust while reducing the negative effects of tax avoidance on company value. These results highlight how crucial it is for Egyptian companies to have ESG policies and lessen their dependency on tax avoidance techniques in order to preserve investor trust and create long-term value.

Though this study offers a substantial contribution, it is important to highlight specific limitations that create possibilities for further investigation. One restriction is this study’s narrow scope, as focusing only on a selected sample could constrain the applicability of the results to industries or firms outside the EGX indexation. Moreover, depending exclusively on quantitative data might hinder a holistic comprehension of the underlying mechanisms driving the relationships revealed by the analysis. Additionally, the period covered by this study (2018–2022) might not completely encompass the effects of recent developments in the regulatory framework and changes that happened in the Egyptian market. It should be mentioned that the years 2018–2022 are marked by important occurrences, such as the COVID-19 pandemic and foreign currency shocks, both of which had a substantial effect on the strategy and value of firms. Therefore, when analyzing the results, it is important to take into account the added volatility and uncertainty these factors brought. These incidents may have had an impact on the financial performance and strategic choices made by businesses during this time.

To overcome these constraints, upcoming research could adopt a more comprehensive approach by expanding the sample size to include companies from various sectors and stock indices. Investigating the impact of external factors on FV, such as political instability, political affiliations, and currency fluctuations, could also provide valuable insights. Furthermore, exploring how board governance characteristics, such as innovation and sustainability, influence FV could yield deeper insights. Lastly, replicating this study in other countries, particularly in regions like South Africa, where relevant studies are rare, would serve to enhance the understanding in this field.