Abstract

This study investigates the investment efficiency of firms engaging in tax avoidance in Indonesia. Using a sample of 2,064 firm-year observations from listed Indonesian firms over the period 2010–2019, we find a positive relationship between tax avoidance and investment efficiency. A unique aspect of this study is the consideration of Indonesia’s tax amnesty program, one of the few such initiatives in developing countries. We specifically analyze firms during the prime tax amnesty implementation period and observe significant results only for firms that did not participate in the amnesty. Our findings remain consistent across alternative measures and robust to Propensity Score Matching regressions addressing potential endogeneity. Moreover, we find that tax avoidance impacts investment efficiency in firms exhibiting tendencies toward both underinvestment and overinvestment. These results contribute to the growing literature on tax avoidance and corporate investment decisions. The findings imply that tax authorities should enforce stricter controls on tax avoidance, given the cost-benefit trade-offs where firms may gain at the expense of state revenues if tax avoidance is inadequately managed.