Conditional Accounting Conservatism and Corporate Tax Avoidance: Evidence from Listed Insurance Firms in Nigeria

Abstract This paper focuses on the complex interaction between conditional accounting conservatism and corporate tax avoidance in the context of the peculiar insurance industry of Nigeria. The study is based on the Agency and Deterrence theories where it is hypothesized that asymmetric timeliness of conditional conservatism conditional recognition of losses and delayed recognition of gains is a dual-purpose mechanism. It reduces the opportunism of managers and at the same time affects corporate tax strategies. The paper uses the Autoregressive Distributed Lag (ARDL) bounds testing model on cointegration with a longitudinal data comprising of 10 insurance companies listed on the Nigerian Exchange Group (NGX) between 2010 and 2023. Basu (1997) asymmetric timeliness model is used to measure conditional conservatism and the Cash Effective Tax Rate (Cash ETR) and of Henry and Sansing (H&S) measure of tax avoidance. The results demonstrate that there is a statistically significant negative association between conditional conservatism and the Cash ETR, and thus, with the higher the conditional conservatism is in firms, the less tax burdens are reported in the long-term. Nevertheless, the correlation between the H&S measure is less obvious. The paper concludes that conditional conservatism is an important restriction of tax avoidance, first of all, it places restrictions on the extent to which accruals-based earnings management could occur, and secondly, it enhances the level of financial reporting transparency, which aligns with the provisions of Agency and Deterrence theories. Such reflections have important implications on regulators, standard-setters, and management of firms in developing economies