The Impact of Financial Supervisory Sanctions on Corporate Tax Avoidance : Evidence from Korea

다국어 초록 (Multilingual Abstract)

This study empirically examines how enforcement actions by the Financial Supervisory Service(FSS) affect the level of tax avoidance among financial institutions. Since the financial industry operates under strict regulation and a sophisticated disclosure and supervision system, enforcement actions by the regulator may exert a more direct influence on tax strategies than in other industries. However, prior research, both domestic and international, has rarely explored the direct relationship between regulatory sanctions and tax avoidance. To address this gap, this study constructs a panel dataset of FSS-inspected and sanctioned financial institutions listed on KOSPI and KOSDAQ between 2011 and 2023. The analysis uses three indicators of enforcement characteristics(Count, Recency, and Severity) along with an interaction term combining media coverage frequency (NEWS). The dependent variables include GAAP ETR, Cash ETR, BTD, and DDBTD, analyzed through a panel regression model with year and firm fixed effects. The results show that FSS enforcement actions do not have a significant immediate effect on reducing current-year tax avoidance, regardless of the type of sanction. However, in the following year, sanctions with higher severity show a significant deterrent effect on certain tax avoidance measures such as Cash ETR and BTD. This finding suggests that regulatory sanctions influence tax behavior through managerial adjustments like strengthening compliance monitoring or improving internal control systems that take time to implement. It also implies that financial institutions respond to regulatory shocks with a time lag. Furthermore, in the next year, higher media coverage and public attention to FSS sanctions are found to strengthen the deterrent effect on tax avoidance. This study contributes as one of the early empirical analyses linking FSS enforcement actions to tax avoidance among listed financial institutions. It demonstrates that supervisory sanctions indirectly affect tax risk management through internal control pressure and compliance reinforcement. Overall, the findings highlight that tax avoidance by financial institutions is a dynamic result of institutional interactions rather than a simple response to tax incentives, suggesting that regulatory policymakers should consider the broader ripple effects of enforcement actions.

목차 (Table of Contents)

• 1. INTRODUCTION 1
• 2. LITERATURE REVIEW 4
• 2.1. Financial Supervisory Examinations and Sanctions 4
• 2.1.1. Structure and Role of the Financial Supervisory System 4
• 2.1.2. Theoretical Background of Supervisory Sanctions 4
• 2.1.3. Supervisory Examination and Monitoring Functions 6
• 2.1.4. Enforcement Actions and Sanctions Mechanisms 8
• 2.2. Corporate Tax Avoidance 10
• 2.2.1. Definition and Classification of Tax Avoidance 10
• 2.2.2. Measurement of Tax Avoidance 11
• 2.2.3. Corporate Determinants of Tax Avoidance 15
• 2.2.4. The Role of Public Attention and Tax Avoidance 17
• 2.2.5. Tax Avoidance in Financial Institutions 19
• 2.3. Mechanisms Linking Supervisory Sanctions to Corporate Tax Avoidance 21
• 2.3.1. Deterrence Channel : Internal Governance & Capital Constraints 21
• 2.3.2. Media Amplification Channel : Public Attention & Reputational Risk 23
• 3. HYPOTHESIS DEVELOPMENT AND RESEARCH DESIGN 25
• 3.1. Hypothesis Development 25
• 3.2. Research Design 28
• 4. SAMPLE AND DATA 33
• 4.1. Sample Selection 33
• 4.2. Descriptive Statistics 35
• 5. EMPIRICAL RESUTLS 38
• 5.1. Current-Year Effects of Supervisory Sanctions 38
• 5.1.1. Baseline Effect on Tax Avoidance(Current effect) 38
• 5.1.2. Moderating Role of Public Media Attention(Current effect) 38
• 5.2. Lagged Effects of Supervisory Sanctions 39
• 5.2.1. Baseline Effect on Tax Avoidance(Lagged effect) 39
• 5.2.2. Moderating Role of Public Media Attention(Lagged effect) 43
• 6. ROBUSTNESS TEST 48
• 6.1. Splitting BTD into Positive and Negative Subsamples 48
• 7. CONCLUSION 50
• 7.1. Summary of Findings 50
• 7.2. Contributions and Policy Implications 50
• 7.3. Limitations and Future Research 51
• REFERENCES 52
• APPENDIX A: DEFINITION OF VARIABLES 55
• APPENDIX B: 5.1. TABLES 56
• ABSTRACT IN KOREAN 61