Corporate Governance Structures, Tax Avoidance, and Financial Fraud: The Moderating Role of Gender Diversity in Indonesia and Pakistan Non-Financial Firms

Abstract

Background: Tax avoidance and financial fraud significantly undermine fiscal integrity, particularly in emerging markets such as Indonesia and Pakistan, where corporate governance frameworks are still evolving. Effective corporate governance is essential for mitigating managerial opportunism (agency problems) that drive this financial misconduct. However, the effectiveness of specific structures, such as independent oversight and CEO duality, remains inconsistent and context-dependent. A critical gap exists in understanding the moderating influence of gender diversity on corporate boards in curbing misconduct within these specific dual-market settings.

Objective: This study examines the impact of corporate governance structures, independent commissioners, concentrated ownership, institutional ownership, and CEO duality on tax avoidance and financial fraud in non-financial firms in Indonesia and Pakistan, with gender diversity as a moderating factor.

Methodology:  This study employs a quantitative, panel data design to analyse the relationships. The sample comprises 2,000 firm-year observations (200 non-financial firms each from the Pakistan Stock Exchange and Indonesia Stock Exchange, covering 2020–2024). Data are sourced from audited financial statements and governance disclosures. Multiple linear regression is used to test the hypotheses, with robust standard errors applied to address potential heteroskedasticity. The model incorporates interaction terms to assess the moderating role of gender diversity and controls for firm-level factors, including Return on Assets (ROA), leverage, and firm size.

Findings: The analysis revealed that Independent Commissioners and Institutional Ownership are significant deterrents, resulting in a reduction of both tax avoidance and financial fraud. Concentrated Ownership was found to be negatively associated with misconduct, but with a comparatively weaker effect. Conversely, CEO Duality significantly increases both tax avoidance and financial fraud. Furthermore, the moderation analysis confirmed that Gender Diversity not only directly reduces misconduct but also significantly strengthens the negative effects of effective governance mechanisms while mitigating the adverse impact of CEO Duality on both outcomes.

Conclusion: Strong governance structures and gender diversity effectively curb tax avoidance and financial fraud, enhancing ethical oversight in emerging markets.

Unique Contribution: This study uniquely integrates gender diversity as a moderator into the governance-misconduct relationship in the understudied emerging markets of Indonesia and Pakistan, thereby contributing to the agency theory literature.

Key recommendation:  Regulators should promote independent oversight, institutional investment, and gender diversity to curb financial misconduct.