دانشگاه اصفهان مدیریت دارایی و تامین مالی 2383-1189 14 3 2026 09 23 Managerial Empire-Building in the Shadow of Tax Avoidance: Is Financial Constraints a Hindrance or a Driver? امپراتوری‌سازی مدیریتی در سایۀ اجتناب مالیاتی؛ آیا محدودیت‌های مالی مانع یا محرک هستند؟ 83 98 29900 10.22108/amf.2025.145085.1980 FA مهدی علی بالائی دکتری تخصصی، گروه حسابداری، واحد اصفهان (خوراسگان)، دانشگاه آزاد اسلامی، اصفهان، ایران Journal Article 2025 04 30 Firms experiencing financial constraints, often a consequence of weak performance, may engage in tax avoidance to alleviate funding pressures. While this practice can mitigate financial strain, it may also create opportunities for managers to pursue self-interested objectives, such as managerial empire-building, at the expense of shareholder wealth maximization. This study examines the effect of tax avoidance on managerial empire-building and investigates the moderating role of financial constraints in this relationship. Using panel data from 105 firms listed on the Tehran Stock Exchange over the period 2014–2022, we test our hypotheses using multiple regression analysis. The results indicate that tax avoidance has a positive and significant effect on empire-building. Moreover, financial constraints strengthen this relationship, implying that managers under greater funding pressure are more likely to divert tax savings toward opportunistic empire-building activities. These findings contribute to the corporate finance and governance literature by elucidating how a firm's financial environment conditions the consequences of tax avoidance. The study highlights the dual nature of tax avoidance: though it can serve as a source of internal financing, it may also enable value-destroying managerial behavior. Consequently, this research offers valuable insights for policymakers, shareholders, and boards of directors aiming to enhance oversight and ensure that tax savings are allocated to value-enhancing investments. Keywords: Tax Avoidance, Management Empire Building, Financial Constraints. JEL Classification: H26, G32, G01 Introduction Managerial empire-building occurs when managers expand firms beyond their optimal size to pursue self-serving behavior, such as prestige, power, and excessive compensation (Bragoli, 2021; Hope & Thomas, 2008). This behavior often leads to overinvestment, inefficient asset growth, and value-destroying acquisitions. It can also diminish financial reporting quality, as managers may selectively conceal information to obscure the outcomes of such activities (Young et al., 2014; Weiskirchner-Merten, 2023). In parallel, tax avoidance is a prevalent corporate strategy aimed at reducing costs and enhancing liquidity (Pratama, 2018). While potentially increasing shareholder wealth in the short term, prior research suggests that in the absence of strong monitoring, managers may divert tax savings toward private gains, including empire-building (Desai & Dharmapala, 2006, 2009; Atwood & Lewellen, 2019). Evidence indicates that weak governance structures amplify these agency problems, ultimately eroding firm value (Hanlon & Heitzman, 2010; Shams et al., 2022; Sadeghi et al., 2023). Empirical studies further document a positive association between tax avoidance and the inefficient expansion of firm assets (Desai et al., 2007; Chen et al., 2010). More recent scholarship emphasizes the moderating role of financial constraints, positing that when external financing is limited, tax avoidance serves as an alternative internal funding channel, thereby exacerbating managerial opportunism (Dhaliwal et al., 2004; Edwards et al., 2013). Building on this theoretical foundation, the present study tests the following hypotheses: 1) Tax avoidance has a positive effect on managerial empire-building and 2) Financial constraints strengthen the positive relationship between tax avoidance and managerial empire-building. The findings are expected to offer valuable insights for shareholders, regulators, and policymakers by elucidating how the interplay between tax avoidance and empire-building distorts corporate resource allocation and potentially undermines broader stakeholder interests. Materials & Methods The analysis utilizes panel data from companies listed on the Tehran Stock Exchange (TSE) over the period 2014-2015. The initial sample was subjected to standard screening procedures, resulting in a final balanced panel of 105 firms. All data were processed and analyzed using EViews 10. The dependent variable, managerial empire-building, is measured using a composite index constructed from five components—acquisitions, consolidations, capital expenditure growth, total asset growth, and tangible fixed asset growth—this index follows the methodologies established in prior literature (Chhaochharia et al., 2012; Levi et al., 2014; Gul et al., 2020; Shams et al., 2022). The index is calculated according to Equation (1), which normalizes the value to a range between zero and one. (1) In this index, the numerator represents the count of conditions satisfied by the firm (each coded as 1), and the denominator is the total number of conditions (five), yielding a normalized score ranging from 0 to 1. The independent variable, tax avoidance (TAX_AVOID), is measured as the ratio of cash tax payments to pre-tax book income, multiplied by –1 (Safari Graili & Pudine, 2016; Lee & Bose, 2021). This measure, often referred to as the cash effective tax rate (ETR), results in higher values indicating a greater degree of tax avoidance. Financial constraints (FC) are measured using the Z-score model developed by BadavarNahandi and Darkhor (2013), specified as follows: (2) This version is efficient and commonly used in high-impact papers. The model incorporates several control variables to mitigate omitted variable bias, including cash holdings, leverage, profitability (return on assets, ROA), firm size, market-to-book ratio, sales growth, firm age, institutional ownership, and CEO ability. CEO ability is estimated using the methodology developed by Demerjian et al. (2012). To test the first hypothesis, the following regression model is estimated: (3) To test the second hypothesis, the interaction term TAX_AVOID × Z-score is added: (4) where a positive and significant β3 indicates that financial constraints strengthen the effect of tax avoidance on managerial empire-building. Findings The descriptive statistics indicate a mean tax avoidance value of –0.0831, suggesting the data are concentrated around this point. Diagnostic tests confirmed the presence of autocorrelation and heteroskedasticity; consequently, the models were estimated using AR(1) and Generalized Least Squares (GLS) methods to correct for these issues. The results indicate that tax avoidance exerts a positive and statistically significant effect on managerial empire-building (β = 0.224, p = 0.009) and supports the firs hypothesis. Among the control variables, cash holdings, financial leverage, profitability, firm size, and sales growth also showed positive and significant associations with empire-building. In contrast, the market-to-book ratio and firm age were negatively and significantly related to the dependent variable. The effects of institutional ownership and CEO ability were found to be statistically insignificant. The model demonstrates strong explanatory power, with an R-squared of 0.64. Regarding the second hypothesis, the analysis reveals that the interaction term between tax avoidance and financial constraints has a positive and significant effect on managerial empire-building (β = 0.234, p = 0.023). This finding suggests that financial constraints amplify the positive effect of tax avoidance on empire-building. Furthermore, a Wald test confirms that the coefficients for the main effect of tax avoidance and the interaction term are jointly significant and statistically distinct from one another (p = 0.045), thereby validating the moderating role of financial constraints. In summary, the results underscore that tax avoidance, by providing internal financial resources, strengthens managers' propensity for empire-building. This relationship is significantly intensified when firms face financial constraints. Discussion and conclusion This study provides empirical evidence that tax avoidance has a positive and significant effect on managerial empire-building, thereby confirming its first hypothesis. This finding aligns with prior research (Sadeghi et al., 2023; Shams et al., 2022) and is well-explained by agency theory. The theory posits that the separation of ownership and control creates opportunities for managers to act in their own self-interest. In this context, tax avoidance serves as a mechanism to generate discretionary resources, which managers may then divert to pursue personal benefits—such as increased compensation, power, and prestige—through empire-building, rather than maximizing shareholder wealth. Furthermore, the results demonstrate that financial constraints significantly strengthen the positive relationship between tax avoidance and empire-building, thus supporting the second hypothesis. This indicates that the pressure of limited external financing exacerbates managerial opportunism, a finding consistent with extant empirical literature. These findings yield several important implications for corporate governance and investment. To mitigate these agency costs, shareholders and boards of directors should enhance monitoring mechanisms and redesign executive compensation contracts to better align managerial incentives with long-term value creation. This could involve appointing independent board members and, in egregious cases, replacing CEOs who persistently engage in value-destroying expansion. For investors, these results underscore the need for vigilant scrutiny of managerial behavior, particularly in firms with weak governance structures. When assessing corporate strategy, investors should distinguish between diversifications that create genuine synergies and those that merely reflect empire-building. In the latter case, where diversification is unrelated and value-destroying, divestiture may be a preferable strategy, as shareholders can achieve diversification more efficiently through their own portfolio choices. هنگامی که به دلیل عملکرد ضعیف شرکت دسترسی به منابع مالی محدود شده باشد، اجتناب مالیاتی می‌تواند نقش مهمی در جهت تأمین منابع مالی ایفا کند. در این بین مدیران فرصت‌طلب می‌توانند از صرفه‌جویی‌های مالیاتی برای ساخت امپراتوری استفاده ‌کنند. هدف اصلی این پژوهش بررسی تأثیر اجتناب مالیاتی بر ساخت امپراتوری مدیریتی باتوجه‌به نقش محدودیت‌های مالی است. نمونۀ آماری این پژوهش شرکت‌های پذیرفته شده در بورس اوراق بهادار تهران و شامل داده‌های 105 شرکت برای دورۀ 9سالۀ 1401-1393 است. برای تجزیه‌وتحلیل داده‌ها و آزمون فرضیه‌‌ها از مدل‌های رگرسیون چندگانه به روش‌ داده‌های ترکیبی استفاده شده است. نتایج نشان داد که اجتناب مالیاتی تأثیر مثبتی بر ساخت امپراتوری مدیریتی دارد و محدودیت‌های مالی این اثر را تقویت می‌کند.

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