Accepted Manuscript

Explaining corporate effective tax rates: Evidence from Greece

Ioannis Stamatopoulos, Stamatina Hadjidema,

Konstantinos Eleftheriou

PII: S0313-5926(18)30223-6
DOI: https://doi.org/10.1016/j.eap.2019.03.004
Reference: EAP 282

To appear in: Economic Analysis and Policy

Received date : 13 July 2018

Revised date : 10 March 2019
Accepted date : 31 March 2019

Please cite this article as: I. Stamatopoulos, S. Hadjidema and K. Eleftheriou, Explaining corporate
effective tax rates: Evidence from Greece. Economic Analysis and Policy (2019),
https://doi.org/10.1016/j.eap.2019.03.004

This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to
our customers we are providing this early version of the manuscript. The manuscript will undergo
copyediting, typesetting, and review of the resulting proof before it is published in its final form.
Please note that during the production process errors may be discovered which could affect the
content, and all legal disclaimers that apply to the journal pertain.
 EXPLAINING CORPORATE EFFECTIVE TAX RATES: EVIDENCE FROM
GREECE

Ioannis Stamatopoulosa, Stamatina Hadjidemaa and Konstantinos Eleftherioua,*

a
Department of Economics, University of Piraeus, 80 Karaoli & Dimitriou Street, 18534
Piraeus, Greece. E-mail: is@forin.gr (Stamatopoulos); shad@otenet.gr (Hadjidema);
kostasel@otenet.gr (Eleftheriou).
* Corresponding author. Tel: +30 210 4142282; Fax: +30 210 4142346

Abstract
This paper examines the determinants of the variability in corporate effective tax rates
before and during the financial crisis in Greece, a country that was, and still is, at the
core of the European Union’s agenda. Analyzing firm-level data for the period 2000-
2014, we find strong evidence that specific firm characteristics including firm size,
financial leverage, capital and inventory intensity influence the level of corporate
effective tax rates. Our results also indicate that corporate effective tax rates increased
in the period after the beginning of the financial crisis, while their association with
some firm-specific characteristics was also affected.

Keywords: Corporate taxation; financial crisis; Greece; tax determinants

JEL Codes: H25; H26

Declarations of interest: none

Acknowledgements: We are grateful to an anonymous referee for helpful suggestions

and comments. All remaining errors are ours.

1
 EXPLAINING CORPORATE EFFECTIVE TAX RATES: EVIDENCE FROM
GREECE

This paper examines the determinants of the variability in corporate effective tax rates
before and during the financial crisis in Greece, a country that was, and still is, at the
core of the European Union’s agenda. Analyzing firm-level data for the period 2000-
2014, we find strong evidence that specific firm characteristics including firm size,
financial leverage, capital and inventory intensity influence the level of corporate
effective tax rates. Our results also indicate that corporate effective tax rates increased
in the period after the beginning of the financial crisis, while their association with some
firm-specific characteristics was also affected.

Keywords: Corporate taxation; financial crisis; Greece; tax determinants

JEL Codes: H25; H26

1. INTRODUCTION
Assessing the impact of the tax system on business activity is of primary

importance to economists, tax advisors, firms and policy makers. One of the most

important elements of the tax system is undoubtedly the statutory corporate income tax

rate. Statutory tax rates may act as an incentive or an obstacle to business investment,

and this is the most obvious reason they have been so widely studied.

Statutory tax rates (STRs), though, do not take into account the tax base of

corporate income tax. Corporate Effective Tax Rates (ETRs), on the other hand,

demonstrate more accurately the effect of corporate taxation, as they incorporate in one

single measure the statutory tax rates as well as the tax base on which income tax is

1
levied. Their study and the way they are determined for different firms across the same

jurisdiction may provide important implications for policy makers and firms.

In this context, this paper focuses on the determinants of corporate ETRs before

and after the beginning of the financial crisis in Greece. It contributes to the existing

literature in various ways. Firstly, this is the only empirical micro-backward-looking

study that has ever analyzed ETRs and their determinants in Greece. Greece is

undoubtedly a country with a relatively small economy that has been proved to be,

though, an important part for the stability, peace and prosperity of the European Union.

We believe, therefore, that an in-depth study of the Greek tax system may enrich policy

makers’ understanding of the tax system of a country that has attracted world-wide

attention during the financial crisis period. Moreover, the Greek economy shares many

common characteristics with the economies of other South European countries such as

Italy, Portugal, Spain and Cyprus, a fact that makes the results of our study equally

important to researchers around Europe. Secondly, this paper investigates the influence

of the financial crisis and of the extensive legislative changes occurred during this

period on firms’ ETRs and their determinants; an issue equally important for

policymakers both inside and outside Greece. Thirdly, the dataset used includes a large

number of firms (a final sample of 4,936 firms is utilized) for an extended period of

time (2000 - 2014), creating one of the largest samples ever studied in this field (74,040

observations) and thus increasing substantially the validity of our results. Last but not

least, this paper addresses econometric specification problems that usually exist in the

literature by controlling for both time - invariant variables and endogeneity. We

strongly believe that these problems might be a major reason for the conflicting results

of previous studies.

2
 The remainder of the paper is organized as follows. In Section 2, we review the

prior research on the major determinants of ETRs. In Section 3, we give an overview of

the institutional background in Greece, focusing on the period after the beginning of the

financial crisis. In Section 4, we develop the hypotheses tested in our study based on the

literature review, the institutional background and the Greek tax legislation. In Section

5, we analyze the sample selection method and describe the variables. In Section 6, we

present the model specification, the estimation strategy and we report and discuss the

results. Finally, Section 7 concludes by summarizing the results, presenting policy

implications as well as potential limitations of the study that could be used as ideas for

further research.

2. LITERATURE REVIEW: ETRs DETERMINANTS

Prior research has focused on ETRs variance across different firms operating in

the same jurisdiction as well as on the neutrality of income tax with regards to specific

firm’s characteristics such as size, financial leverage, capital and inventory intensity.

The relationships that have been examined in the literature are reviewed below.

2.1. ETR and firm’s size

The prevailing theories of the relationship between ETR and firm’s size are two:

the political cost theory and the political power theory. Under the political cost theory,

large firms are expected to be taxed at a higher ETR as they are more easily targeted by

the government, tax authorities and public opinion (Zimmerman, 1983; Watts and

Zimmerman, 1986). As a result, law changes could be designed exclusively to re-

distribute wealth from these firms to priority groups. On the other hand, under the

political power theory, large firms are expected to be taxed at a lower ETR as they have

3
the resources to influence the legislative procedure to their benefit either directly or

through their professional unions (Siegfried, 1972).

Researchers have repeatedly examined the relationship between firm’s size and

ETR. The results were conflicting, though, as there are supporting evidence for both the

political cost theory (e.g., Zimmerman, 1983; Wilkie and Limberg, 1990; Kern and

Morris, 1992) and the political power theory (e.g., Siegfried, 1972; Porcano, 1986).

Nicodeme (2007), trying to interpret these conflicting results, argues that these studies

were carried out in a univariate context with size as the sole explanatory variable which

might have led to biased coefficients. On the contrary, recent studies were conducted in

a multivariate context but, nonetheless, the degree of conflict in the results was not

significantly reduced. There are recent researches that empirically confirmed the

political power theory (e.g., Richardson and Lanis, 2007), others that confirmed the

political cost theory (e.g., Vandenbussche and Tan, 2005), and still others with mixed

results (e.g., Gupta and Newberry, 1997; Janssen and Buijink, 2000; Nicodeme, 2002;

Vandenbussche, Crabbe and Janssen, 2005).

2.2. ETR and firm’s financial leverage

A firm has three ways to finance its activities: equity financing (that is, raising

money by issuing shares), debt financing (that is, raising money through loans) and,

more often, a combination of these two types of financing. In each financing method, a

fee must be paid back to the financiers either as a dividend (in the case of equity

financing) or as interest (in the case of debt financing). Focusing on the way interest and

dividends are treated in tax legislation, a negative association between ETR and firm’s

leverage is usually expected as interest is usually tax deductible whereas the distributed

dividends are not. This distinction creates an apparently more favorable tax regime for

4
firms that prefer debt financing leading to the reasonable assumption that firms with

higher financial leverage face lower ETRs than firms that prefer equity financing. It is

noteworthy that variations of this general rule may exist in tax systems across the world,

such as, for example, in Belgium, where, as Crabbe (2010) notes, a certain percentage

of equity may be deducted from the taxable income.

The effect of financial leverage on ETR has been empirically examined in the

literature. The majority of studies confirm the expected negative relationship between

these two variables, as firms with higher financial leverage exhibit lower effective tax

rates (Stickney and McGee, 1982; Buijink et al., 1999; Vandenbussche et al., 2005;

Richardson and Lanis, 2007; Crabbe, 2010). However, some studies demonstrate that

there is a positive and significant relationship between ETR and financial leverage

(Harris and Feeny, 2003; Janssen, 2005). Finally, it is worth noting that Gupta and

Newberry (1997) conclude that the sign of this relationship is sensitive to the income

measure used in the denominator of the ETR.

2.3. ETR and firm’s capital intensity

Fixed assets are assets “that are held for use in the production or supply of goods

or services, for rental to others, or for administrative purposes and are expected to be

used during more than one period” (IASB, 2016a). Firms can systematically allocate the

depreciable amount of an asset over its useful life, that is, they can allocate the cost of

the asset less its residual value over the period over which it is expected to be used by

the firm. This allows firms to offset part of the cost undertaken against future profits,

especially given the fact that losses can be carried forward up to a specific amount of

years. It is, therefore, expected, that, ceteris paribus, a firm which invests in increasing

its fixed assets will exhibit lower effective tax rates. This hypothesis is further

5
strengthened by the possible existence of other tax incentives for firms that invest in

fixed assets.

Empirical research typically confirms this negative relationship. Stickney and

McGee (1982), Gupta and Newberry (1997), Vandenbussche et al. (2005), Janssen

(2005), Richardson and Lanis (2007) and Crabbe (2010) concluded, among others, that

firms with higher fixed-assets ratios face lower ETRs.

2.4. ETR and firm’s inventory intensity

Inventories are “assets held for sale in the ordinary course of business, or in the

process of production for such sale, or in the form of materials or supplies to be

consumed in the production process or in the rendering of services” (IASB, 2016b).

Gupta and Newberry (1997) were among the first to include an inventory ratio in their

ETR study. They argue that to the extent that the inventory ratio is a substitute for the

fixed - assets ratio, inventory-intensive firms should face relatively higher ETRs, as long

as these firms use the same inventory method for both book and tax purposes. This

hypothesis has been confirmed empirically by subsequent studies (e.g., Richardson and

Lanis, 2007). However, there do exist other studies that didn’t result in a statistically

significant relationship between inventory intensity and ETR (e.g., Derashid and Zhang,

2003; Adhikari et al., 2006).

2.5. ETR and events during the reference period

Specific events during the reference period may also cause variation in the

firms’ ETRs and their determinants. Such events may be, for example, a tax reform, a

government change, or the outbreak of a financial crisis. Past studies focused on

possible variations in firms’ ETRs and their association with firm’s specific

characteristics in the periods following a tax reform. For example, Gupta and Newberry

6
(1997) studied the impact of the U.S. Tax Reform Act of 1986 and Richardson and

Lanis (2007) the impact of the Australian Ralph Review of Business Taxation Reform.

On the other hand, there are no empirical studies, at least to the best of our knowledge,

that focus on other events that may have an effect on a firm’s ETR such as the beginning

of a financial crisis or a government change.

2.6. ETR and other firm characteristics

A firm’s ETR has been previously reported to be affected by several other firm

characteristics. For example, the sector in which a firm operates may lead to different

ETRs. As Nicodeme (2002) states, measures of technical nature (e.g., depreciation

rules), measures that may be implemented as policy objectives (e.g., tax exemptions for

R&D expenditures) or specific discretionary administrative practices may result in

differential tax treatment of firms operating in different sectors of the economy. Sector’s

impact on ETRs has been empirically confirmed in various studies (e.g., Stickney and

McGee, 1982; Buijink et al., 1999; Nicodeme, 2002; Derashid and Zhang, 2003;

Vandenbussche et al., 2005; Richardson and Lanis, 2007; Crabbe, 2010).

The location of the firm has been also reported to influence the firm’s ETR.

Specifically, Vandenbussche et al. (2005) showed that a part of the variation of the

Belgians firms’ ETR can be attributed to the region that the firms operate in.

A firm’s ETR, as a function of its tax to pretax income, may also change simply

due to changes in pretax income. To control for these changes, relevant studies add a

profitability measure as a control variable. Given that holding a firm’s tax preferences

and total assets constant while increasing its profitability, will increase its ETR (Wilkie,

1988), a positive relationship between profitability and ETRs can be expected (Gupta

and Newberry, 1997; Harris and Feeny, 2003; Richardson and Lanis, 2007).

7
 Other firm characteristics that may have an impact on ETRs is the extent of the

firm’s foreign operations (Stickney and McGee, 1982; Gupta and Newberry, 1997;

Buijink et al., 1999; Harris and Feeny, 2003; Rego, 2003; Janssen, 2005), the firm’s

extent of involvement in research and development (Gupta and Newberry, 1997; Buijink

et al., 1999; Harris and Feeny, 2003; Richardson and Lanis, 2007), the auditor and tax

advice expenses (Crabbe, 2010), the firm’s individual executives (Dyreng et al., 2010),

the firm’s listing on the stock market (Mills and Newberry, 2001; Cloyd et al., 1996;

Janssen, 2005; Crabbe, 2010), the firm’s ownership structure, its management

compensation policies, its corporate culture as well as possible corporate

reorganizations through mergers and acquisitions (Gupta and Newberry, 1997).

3. INSTITUTIONAL BACKGROUND
Greece is a euro-zone country with a relatively small economy. After the

outburst of the 2008 global financial crisis, the Greek economy, which is characterized

by low productivity, weak external competitiveness and unresolved structural problems,

showed the first signs of recession1 and proved, over time, unprepared to tackle the

financial difficulties encountered. In such a context, Greece asked for the financial

support from the European countries and the International Monetary Fund (IMF) in

April 2010. An agreement was reached in May 2010 on a policy package supported by

official financing for a total amount of €77.3 billion to be released over the period May

2010 to June 2013. In March 2012, European countries approved financing of the

second economic adjustment program for Greece. The European countries and the IMF

1
In 2008, Greece’s GDP started to decrease after an extended period of high growth rates, by 0.2% (Bank
of Greece, 2014). In the following years (2009 – 2014) GDP declined cumulatively by more than 25%. In
the same period, the unemployment rate shot up from 7.6% in 2008 to 26.1% in 2014. The cumulative
decline in total and dependent employment exceeded 18% (18.40% and 18.34%, respectively) (statistics
were retrieved from the Hellenic Statistical Authority, http://www.statistics.gr/en/statistics/eco).

8
committed the unreleased amounts of the first program plus an additional €130 billion

for the period 2012 – 2014. Finally, the current third economic adjustment program

started in August 2015 providing, through the European Stability Mechanism (ESM),

financial assistance to Greece of up to €86 billion.2 The third program expired in August

2018 and Greece has now entered into the post-program monitoring framework.

Within the framework of the stability support programs, Greece was expected to

reform tax legislation in order to meet the tax revenue targets set by the country’s

creditors. In this context, corporate income tax legislation has been under continuous

scrutiny after the beginning of the financial crisis in Greece.

It is worth mentioning that corporate income tax legislation is an important part

of the Greek tax system, as corporate income tax accounts for 5.2% of the total revenue

collected by the government or 1.9% of the country’s GDP (European Commission, DG

Taxation and Customs Union, 2016, p. 223-224). Moreover, the firms that are subject to

corporate income tax contribute indirectly to the public revenue through the tax

withheld on the profits distributed to their shareholders while they are also responsible

for about 67% of the total employment in the country.

Corporate income tax legislation has undergone some major changes during the

period after the first stability support program for Greece. Among the most significant

changes that have occurred, one can highlight that:

2
More information on the stability support programs for Greece can be found at:
https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-
assistance/which-eu-countries-have-received-assistance/financial-assistance-greece_en

9
 • The statutory corporate income tax rate has increased by 45% from 2011 to

2015 (from 20% to 29%). It has changed a total number of seven times between

2000 and 2014.3

• The corporate income tax prepayment rate increased from 55% (2000 – 2004)

and 65% (2005-2007) to 80% (2008 – 2014). This rate increased again in 2015

and is currently 100%.

• From 2010 onwards, income is determined on an accounting basis with almost

no exception, replacing numerous provisions for imputed and autonomous

taxation for a number of professional categories.

• From 2010 onwards, tax audits are conducted based on a risk-analysis system

which allows the selection of audit cases using sampling techniques.

• From 2011 onwards, tax returns are submitted exclusively in electronic format,

reducing significantly the administrative resources needed to collect tax data.

• From 2011, certified auditors are performing a Special Tax Audit Program to

the Public Limited Liability Companies and to the Limited Liability Companies

whose financial statements are obligatorily subject to a statutory audit (this

procedure is optional from 2016 onwards). After the completion of the tax audit,

the certified auditors issue a “Tax Certificate” regarding the firm’s compliance

with the tax legislation. Based on the auditors’ recommendations, the firm may be

further audited by the tax authorities, with priority being given when reservations

issues arise.

3
Statistics were derived from the online database of http://www.forin.gr.

10
 • From 2010 onwards, self-control criteria were also established, including the

obligation of the tax practitioners to exclude the non-tax-deductible expenses

using a special form submitted with the income tax return.

• In 2011, the institution of the Public Prosecutor for Financial Crimes was

introduced. The Prosecutor is responsible for detecting tax fraud and tax evasion

to the detriment of the Greek State.

• From 2010 onwards, business transactions are, to a great extent, required to

take place through the banking system.

• From 2010 onwards, various law provisions have been introduced towards the

abolishment of banking secrecy, allowing tax authorities to have access to the

taxpayers’ bank accounts to combat tax fraud and tax evasion, where necessary.

It is apparent that the changes in the Greek tax legislation have been more than

extensive after 2010 and continue even today at an unabated pace [as a matter of fact,

more than 400 major and minor changes4 have been introduced in the current Income

Tax Code (2013) during the four-year period (2013 – 2017) after its entry into force].

Recognizing the extent of the legislative changes, we seek to examine the determinants

of the variability in corporate effective tax rates before and after the beginning of the

financial crisis in Greece.

4. DEVELOPMENT OF HYPOTHESES
This section describes the hypotheses that we will test, based on the previous

literature review, the institutional background and the specific characteristics of the

Greek tax system.

4
Statistics were derived from the online database of http://www.forin.gr.

11
 Regarding firm’s size association with ETRs, it can be stated that, although there

are no direct law provisions in the Greek Income Tax Code (Income Tax Code, 2013;

Income Tax Code, 1994) that may cause variation in the ETRs of firms of different size,

there are several other reasons why such a variation can be expected. In particular, ETR

differences may occur due to provisions that differentiate firms’ tax treatment according

to their size, as, for example, the bookkeeping obligations (Greek Accounting

Standards, 2014; Code of Tax Reporting of Transactions, 2012; Code for Books and

Records, 1992), the tax exemptions of the investment laws (e.g., Investment Law, 2011)

and the existence of specific tax audit authorities for large firms (e.g., the Audit

Authority for Large Enterprises). All the above, if added to the preceding literature

review, can lead to the hypothesis that a positive relationship between firms’ ETR and

their size can be expected, taking furthermore into account that tax legislation seems to

create a less demanding environment for small and medium-sized firms in Greece

(allowing them, for example, to keep their accounting books in less detail).

H1: Firm’s ETR is positively related to its size

The Greek Income Tax Code allows the deduction of interest from taxable

income which leads, as a result, to lower taxable income and lower tax. On the contrary,

dividends are not tax deductible. The above combination creates a favorable tax

environment for firms with higher financial leverage in Greece and therefore, in line

with previous literature, a negative relationship between ETR and financial leverage is

expected.

H2: Firm’s ETR is negatively related to its financial leverage

The Greek Income Tax Code allows firms to depreciate yearly their fixed assets

allocating their cost over their useful life, giving firms the chance to offset part of the

12
cost undertaken against future profits. Since fixed assets’ useful life may extend up to

20 years and at the same time losses can be carried forward up to 5 years, there may

exist a preferential treatment for firms that invest more in fixed assets in comparison,

for example, with firms that have to recognize the total amount of their expenses in the

period incurred. Moreover, firms in Greece enjoy specific tax exemptions provided by

investment laws when investing in property, plant and equipment. Based on the above

law provisions, we can expect a negative relationship between firms’ ETR and their

capital intensity.

H3: Firm’s ETR is negatively related to its capital intensity

Under the Greek Income Tax Code, firms are obliged to use the same inventory

method for both book and tax purposes, creating a tax - neutral environment with no

signs of differential tax treatment for inventory intensive firms. Given, though, Gupta’s

and Newberry’s (1997) hypothesis that inventory-intensive firms should face relatively

higher ETRs to the extent that the inventory ratio is a substitute for the fixed - assets

ratio, we also expect that the firm’s ETR will be positively related to its inventory

intensity.

H4: Firm’s ETR is positively related to its inventory intensity

Considering that the conditions in the Greek economy have deteriorated in the

period after the beginning of the financial crisis, it is reasonable to expect that the tax

authorities have intensified their efforts to collect tax revenue by conducting more

audits and implementing tax legislation more rigorously. In addition, extensive

legislative changes have been adopted to secure corporate income tax revenue (see

Section 3). On the other hand, firms may have tried to adapt to the current financial

13
situation by engaging more in tax planning activities. A change in the mean ETR can be

therefore expected in the sub-period after the beginning of the financial crisis.

H5: Firm’s ETR are affected by the financial crisis period in Greece

Furthermore, it is also possible that the financial crisis period influenced ETRs’

association with firm’s specific characteristics (such as its size, capital intensity,

inventory intensity and financial leverage). In more detail, it can be expected that larger

firms may be more capable to adjust their strategy to the new circumstances, achieving,

as a result, lower ETRs. The same holds true for inventory-intensive firms that are

usually more flexible in comparison with capital – intensive firms that invest in the

long-run and cannot easily adapt to the changing environment. Finally, firms with

higher degree of financial leverage are expected to be more affected by the liquidity

constraints after the beginning of the financial crisis, a fact that may alter, as a result,

their taxable income and their ETRs.

H5a: The association between ETR and firm’s specific characteristics (size,

financial leverage, capital and inventory intensity) is influenced by the financial crisis

period in Greece

5. SAMPLE, DATA AND VARIABLES

5.1. Sample and Identification Strategy

Our sample was collected from the ICAP Databank, the largest company

database in Southeast Europe. It consisted initially of 53,235 firms operating in Greece

over the period 2000 - 2014. The initial sample was then reduced by excluding firms

falling into the following categories:

Firms with missing data in the reference period

14
 The initial sample included firms with missing data. These firms were removed

from the dataset resulting in a sample with firms that have data for the entire 15-year

period.5

Financial Firms and Insurance Companies

Firms operating in the financial and insurance sector are excluded from the final

sample as they are subject to different regulation, a fact that may lead to

misinterpretations and conflicting results (Gupta and Newberry, 1997; Kim and

Limpaphayom, 1998; Buijink et al., 1999; Richardson and Lanis, 2007).

Firms with negative, “false” positive or greater than 1 ETRs

Based on the existing literature, we also excluded from the final sample:

1. Firms with negative ETRs (Holland, 1998; Kim and Limpaphayom, 1998;

Derashid and Zhang, 2003; Vandenbussche et al., 2005; Richardson and

Lanis, 2007). The exclusion of these firms was considered necessary as

ETR is a ratio that can be negative either due to negative tax (tax refunds)

or negative income (loss), a fact that may lead to misinterpretation

problems.6

2. Firms with “false” positive ETRs which implies simultaneously negative

tax (tax refund) and negative income (loss). Similarly, these firms were

excluded from the final sample as the “false” positive ETRs may also cause

misinterpretation problems.

5
Our dataset does not allow us to examine in depth firms that did not “survive” the financial crisis as no
information is available for the exact reason of missing observations (whether, for example, there are
firms that ceased their activity during this period or firms that, for any other reason, have missing data).
6
The exclusion of these observations does not mean that the research is conducted only on profitable
firms. On the contrary, loss-making firms are still included in the sample combining negative income with
zero income tax and zero ETRs.

15
 3. Firms with ETRs greater than 1, since these observations can cause model

estimation problems (Stickney and McGee, 1982; Gupta and Newberry,

1997; Kim and Limpaphayom, 1998; Derashid and Zhang, 2003;

Richardson and Lanis, 2007)

The final sample, after the exclusion of the firms mentioned above, consists of

4,936 firms and 74,040 observations for the period 2000 - 2014. Table 1 summarizes the

way the final sample was constructed.

[INSERT TABLE 1 ABOUT HERE]

5.2. Variables

5.2.1. Dependent variable

The dependent variable is the corporate effective tax rate (ETR). ETRs, in micro

backward-looking approaches, are typically calculated as the ratio of a measure of

income tax to an income measure. Considering the available options in the literature, we

use three ETR measures. These three measures share the same numerator which is the

worldwide income tax payable.7 Three different income measures (net income before

taxes, operating result, EBITDA) have been used in the denominator of the ETR

measures. As a result, the first measure (ETR1) is defined as the ratio of worldwide

income tax payable to net income before taxes; the second measure (ETR2) is defined as

the ratio of worldwide income tax payable to operating result, and the third measure

(ETR3) is defined as the ratio of worldwide income tax payable to earnings before

interest, taxes, depreciation and amortization (EBITDA).

5.2.2. Independent and control variables

7
Deferred taxation was not taken into account in the numerator of ETR as it was not allowed in Greece
during the reference period (with the exception of a small number of firms that prepare their financial
statements in accordance with IFRS).

16
 Firm-specific variables are included in our study by proxies for firm size,

financial leverage, capital intensity and inventory intensity. Specifically, firm size

(SIZE) is measured as the natural logarithm of total assets. Financial leverage

(LEVERAGE) is measured as the ratio of medium/long - term liabilities to total assets.

Capital Intensity (CAPINT) is measured as the ratio of net fixed assets to total assets.

Inventory Intensity (INVINT) is measured as the ratio of end-year’s inventory to total

assets.

Return on Assets (ROA), which is included to control for profitability, is

measured as the ratio of net income before taxes to total assets. Statutory tax rates (STR)

are also included to control for their frequent change during the reference period (2000

– 2014). The dummy variable (NLO) is used to account for firms with negative income

(loss) reported in year t-1. This variable was considered necessary to take into account

the possible tax loss carry-forwards.

Additionally, dummy variables for sectors (SECTOR), location (REGION), legal

form (LEGALFORM) and exporting firms (EXPORTS) are included in the specification

to account for time-invariant characteristics that may cause variation in firms’ ETR.

Finally, to assess the impact of the crisis period on corporate ETRs, a period dummy

variable (CRISIS) is included in our model. The CRISIS variable is coded 1, if the

observation is for the sub-period after the beginning of the global financial crisis, that is

2008 to 2014 or 0 otherwise, that is 2000 - 2007. The CRISIS coefficient tests the mean

change in the ETRs after the beginning of the financial crisis. Moreover, on the basis of

previous literature, four interaction terms have also been formed. These interaction

terms were calculated by multiplying the CRISIS dummy variable by each of the main

17
independent variables (SIZE, LEVERAGE, CAPINT, INVINT)8 and allow us to test for

any change in the coefficients of the independent variables after the beginning of the

financial crisis. It should be highlighted that the interaction terms significantly affect the

interpretation of the regression results, as the firm-specific coefficients (SIZE,

LEVERAGE, CAPINT, INVINT) refer to the pre-crisis period (2000-2007), while the

sum of each one of the above coefficients and the coefficient of its corresponding

interaction term refers to the period after the beginning of the financial crisis (2008-

2014).

Due to data constraints, other factors such as the firm’s extent of foreign

operations, its involvement in research and development, its auditor and tax advice

expenses, its ownership structure, its management compensation policies and its

corporate culture were excluded from the analysis.

5.3. Descriptive Statistics

Table 2 presents some descriptive statistics (mean, median, standard deviation,

minimum, maximum) for the three selected ETRs and the main explanatory variables.

[INSERT TABLE 2 ABOUT HERE]

We notice that the ETR1 has a mean of 15.2% and a median of 9.60%. ETR2 has

a mean of 14.4% and a median of 6.7% while ETR3 has a mean of 8.8% and a median of

0.9%. Considering that the three ETR measures have the same numerator (worldwide

income tax payable) and the denominators are respectively the net income before taxes

(ETR1), the operating result (ETR2) and the EBITDA (ETR3), it is reasonable that on

average ETR1 is greater than ETR2 and ETR2 is greater than ETR3. These statistics

8
For an overview of the variables, see Tables A1 – A3 in the Appendix.

18
indicate, in other words, that the sample firms pay on average 15.2% of their net income

before taxes as income tax, 14.4% of their operating result and 8.8% of their EBITDA.

Concerning the independent variables, SIZE has a mean of 14.28 and a median

of 14.22, LEVERAGE has a mean of 0.066 and a median of 0, CAPINT has a mean of

0.41 and a median of 0.347, and INVINT has a mean of 0.131 and median of 0.427.

Moving on to the analysis of the categorical variables, we can also make some

particularly interesting observations. For example, ETR1 ranges on average from 4.6%

in Arts, Entertainment and Recreation sector to 22.4% in Human Health and Social

Work Activities sector. Similarly, ETR1 appears to be lower on average in the Greek

Islands (6.9% in the Ionian Islands, 7.8% in Crete and 9.5% in the Aegean Islands) and

higher in Continental Greece, the area which includes, Athens, the capital city of Greece

(18.6%). We also notice that the limited liability companies (EPE) face on average

about 5% higher ETR1 than the public limited liability companies (AE) (19.9% to

14.9%). Similar results are obtained when examining the other two ETR measures.9

Another interesting point to consider is that the mean ETR1 decreases from

18.1% in the pre-crisis period (2000 - 2007) to 12.9% in the period after the beginning

of the financial crisis (2008 – 2014). Building on this observation, we notice that the

dependent variables (ETR1, ETR2, ETR3) differ between the two periods (2000 – 2007

and 2008 – 2014) significantly at the 1% level (see the two-sample tests in Table 2

above).

Considering the correlations among the variables (Table 3), it is worth

emphasizing that there is a positive correlation between SIZE and ETRs as well as

between INVINT and ETRs. On the other hand, there is a negative correlation between

9
Detailed tables are available upon request.

19
CAPINT and ETRs and LEVERAGE and ETRs. A conclusion that can be reached is that

CAPINT and INVΙΝΤ which are negatively correlated may act as substitutes in our

sample, a finding that may be useful for explaining the relationship between ETR and

inventory intensity.

[INSERT TABLE 3 ABOUT HERE]

6. METHODOLOGY AND RESULTS

6.1. The Empirical Specification

The test of our hypotheses will be based on the following empirical

specification:

ETR zit = a 0 + a1 SIZE it + a 2 LEVERAGE it + a 3CAPINT it + a 4 INVINT it + a 5 ROA it + a 6 STR it

q −1
+ a 7 NLO it + a 8 CRISIS t + a 9 LEGALFORM i + a10 EXPORTS i +  a11 j SECTOR ij
j =1

l −1
+  a12 k REGION ik + a13 CRISIS t * SIZE it + a14 CRISIS t * LEVERAGE it
k =1

+ a15 CRISIS t * CAPINT it + a16 CRISIS t * INVINT it +  i +  it

(1)

where the dependent variable, ETRzit, is the corporate effective tax rate proxy. The

independent variables include proxies for firm size (SIZE), financial leverage

(LEVERAGE), capital intensity (CAPINT), inventory intensity (INVINT), profitability

(ROA), corporate statutory income tax rates (STR), a dummy variable for firms with net

operating losses in year t-1 (NLO), sector (SECTOR), location (REGION), legal form

(LEGALFORM), exports (EXPORTS), crisis (CRISIS) and interaction terms

(CRISIS*SIZE, CRISIS*LEVERAGE, CRISIS*CAPINT, CRISIS*INVINT). The

unobserved specific error is denoted by  i and  it is the usual error term (observation

specific error). The subscripts denote the three alternative proxies that are used for

effective tax rates (z), the sector (j), the location (k), the time dimension (t), and the firm

20
(i). Finally, q and l denote the number of sectors and the number of regions,

respectively.

Given the fact that our specification contains four time-invariant variables

(SECTOR, REGION, LEGALFORM, EXPORTS) as well as endogenous independent

variables, the most appropriate estimation method is the one proposed by Hausman and

Taylor (1981). More specifically, a fixed-effects model is not suitable for this case as all

time-invariant characteristics will be eliminated and absorbed by the fixed-effects in the

specification. On the other hand, a random-effects model allows the inclusion of time-

invariant variables in the specification. It is based, though, on the hypothesis that the

independent variables are uncorrelated with the unobserved time-invariant random

variable, which is not true in our case; according to the literature, a bi-directional

causality between ETR and some of the independent variables most probably exists. At

first, analyzing the relationship between ETR and LEVERAGE and, given that interest

expenses are tax deductible, it is possible that firms with high marginal tax rates are

more likely to use debt financing, reversing in that way the cause – effect examined

relationship. In the same context, it has been noted that low ETRs may cause lower

levels of some of the firm-level investment variables (Vandenbussche et al., 2005).

Moreover, it has been empirically proved that the ETRs affect the size distribution of

firms (Heshmati et al., 2010). We also believe that total assets, which are used as a

proxy for firm’s size, are most probably correlated with the unobserved time-invariant

random variable through omitted variables that cannot be included in our model due to

data constraints (e.g., corporate culture). On the same basis, statutory tax rates as well

the firm’s net operating losses have been reported to be correlated with firm’s tax

reporting aggressiveness (e.g., Clotfelter, 1983 and Frank et al., 2009, respectively).

21
Given that our specification does not account for the firm’s overall attitude towards

aggressive tax reporting, these two variables may also correlate with the model error

term.

For all these reasons, SIZE, LEVERAGE, CAPINT, INVINT, STR, NLO and ROA

should be all treated as endogenous variables. The same holds for the interaction terms

created using these variables.

To this end, we decided to use a Hausman-Taylor random effects model which

allows the inclusion of time-invariant variables accommodating simultaneously the

potential endogeneity problems that may occur.

6.2. Results and Discussion

Table 4 summarizes the Hausman-Taylor random effects model results. The

results are based on a sample of 4,936 firms operating in Greece for the period 2000 -

2014 (74,040 observations). The test of our hypotheses is based on equation (1).

[INSERT TABLE 4 ABOUT HERE]

All of the regression models in Table 4 are statistically significant at less than

the 0.01 level as the Wald tests reject the hypothesis that the estimated coefficients are

jointly equal to zero.

As regards the ETR determinants, we find that the corporate ETRs in Greece

vary with specific firm characteristics such as the firm’s size, financial leverage, capital

and inventory intensity.

More specifically, the results indicate that larger firms face higher ETRs than

smaller firms. This positive association between ETR and SIZE, which is significant at

the 1% level (p < 0.01), is consistent with the hypothesis H1 and the political cost

theory, implying that larger firms in Greece cannot escape the tax authority’s attention

22
and are not capable of exploiting their power to reduce their tax burden, at least not to a

considerable degree. One other possible explanation for this result is that larger firms

may downplay the goal of reducing their tax liability in favor of the impression of

financial soundness that needs to be given to the firm’s stakeholders (e.g., shareholders,

creditors). As a result, larger firms are taxed at higher ETRs than smaller firms.

Taking into consideration that the sample’s firms are diverse in size, the

investigation of this relationship within different size groups is of particular interest. For

this purpose, we divided our sample into three subsamples according to the size

categories specified in the Greek Accounting Standards (2014).10 We estimated then a

series of regressions based on equation (1). The results (see Table A7) show that the

relationship between ETR and SIZE maintains its sign and its statistical significance

(p<0.01) in every subsample examined. This finding definitely strengthens our main

results by proving that this positive relationship can be confirmed both between and

within size groups.

Regarding the firm’s financial leverage (LEVERAGE), there appears to exist a

statistically weak and negative association with ETR, failing to confirm H2 hypothesis.

This negative relationship is an indication that firms preferring debt to equity financing

face lower effective tax rates; a conclusion that would be reasonable, considering that

interest is deductible from taxable income whereas dividends are not. However, there

seems to be other factors that affect this relationship. In this respect, we classified firms

according to the level of their financial leverage into two groups: over and under-

10
The three subsamples examined, consisted exclusively of very small, small and medium-large
enterprises, respectively. Medium and large enterprises were treated as one size group due to their
relatively lower sample representation.

23
leveraged firms.11 We divided then our sample into two subsamples and we estimated

two regressions based on equation (1). The results (see Table A8) show that this

negative association between ETR and LEVERAGE appears not to be statistically

significant for the over-leveraged firms. On the contrary, this relationship is negative

and statistically significant at 1% level (p<0.01) when only the under-leveraged firms

are examined. This finding implies that the under-leveraged firms achieve lower

effective tax rates when their financial leverage increases. In other words, the expected

negative relationship between ETR and LEVERAGE can be confirmed up to an average

level of financial leverage. This comes as no surprise taking into account the trade-off

theory (Kraus and Litzenberger, 1973) which suggests that there is an optimal level of

leverage between the tax benefits of debt and the bankruptcy penalties. In this context,

firms that exceed this optimal level are expected not to engage in debt financing at least

not for tax purposes. This is most probably the reason why this negative relationship

between ETR and LEVERAGE weakens substantially when examined above an average

level of financial leverage.

Exploring further this relationship and bearing in mind Graham and Tucker’s

(2006) finding that firms use less debt when they engage in aggressive tax planning, we

also examine whether there exists any association between tax risk, financial leverage

and corporate effective tax rates. For this purpose, we included in our model a variable

to control for firm’s tax risk (TAXRISK)12 and repeated the multiple regression analysis

specifically for the under-leveraged firms. The results (see Table A9) indicate that the

11
Firms were defined as over-leveraged if the firm’s average financial leverage throughout the reference
period is above the total average and under-leveraged otherwise.
12
According to Guenther et al. (2013), tax risk, as a measure of firm’s ETR volatility, can be proxied by
the standard deviation of the firm’s ETR over the reference period.

24
association between ETR and LEVERAGE remains negative and statistically significant

(p<0.01) for these firms even after controlling for the firm’s tax risk, a fact that

undoubtedly strengthens the validity of our main results.

For the capital intensity measure (CAPINT), the results indicate that it has a

significant negative association with ETR (p<0.01). This finding is consistent with H3

hypothesis, proving that there exists a preferential tax treatment for firms that invest in

their fixed assets in Greece. We believe that Income Tax Code’s provisions for assets’

depreciation and the tax exemptions provided by investment laws have a key role in this

association. Furthermore, it is noteworthy that the magnitude of the CAPINT’s

coefficient is of considerable size comparing to the coefficients of the other main

independent variables.

As regards the inventory intensity (INVINT), there appears to be a significant

negative association between INVINT and ETR (p < 0.01), a finding that contradicts H4

hypothesis and consequently Gupta’s and Newberry’s (1997) hypothesis. This negative

association is observed despite the fact that the underlying assumption of Gupta’s and

Newberry’s hypothesis, that inventory intensity ratio is a substitute for the capital

intensity ratio, does also apply to our sample (see Table 3). It needs to be mentioned

though that there are also other factors that may have an impact on this relationship,

which were not taken into account in previous research as, for example, inventory’s

relationship with sales. Specifically, it is reasonable to expect that if inventory grows

faster than sales, a price reduction will follow leading to lower sales revenue and

income and consequently to lower tax. This relationship has been confirmed empirically

in the past when Bernard and Noel (1991) found that increases in inventory translate

into lower prices and lower net income. Examining this relationship in our dataset, we

25
notice that inventory growth is about two times greater on average than sales growth

(see Table A4 in the Appendix), a finding that could probably explain the negative

association between ETR and INVINT, especially taking into account that we also

control for changes in firm’s profitability. Furthermore, it should be noted that an

increase in INVINT will automatically lead to increased storage costs, reducing therefore

the firm’s taxable income and its income tax. Last but not least, it can be stated that an

increase in INVINT is a sign of inefficient use of firm’s resources. In this context, firms

seem not to be able to allocate their resources in more profitable investments, a fact that

will probably lead to lower profits and lower income tax.

Proceeding with the effect of statutory corporate income tax rates on ETR, there

exists a statistically significant positive association (p<0.01) between the two variables.

This finding can be considered reasonable, since, as the statutory tax rate increases, the

corporate effective tax rate increases too. It is interesting, though, that the coefficient of

STR does not imply a total positive effect (specifically, a 1% increase in the STR leads

to a 0.42% increase of ETR1), a fact that is, undoubtedly, a useful finding for

policymakers.

Regarding the loss-making firms, there exists a significant negative association

(p<0.01) between the reporting of financial losses in year t-1 and the ETR in year t. This

result was also expected, as firms are allowed to carry their losses forward reducing,

therefore, their corporate effective tax rates.

Finally, as regards the firm’s profitability (ROA) which is included in our model

as a control variable, it is positively associated with ETR, as expected, with accepted

statistical significance, though, only for our basic dependent variable (ETR1).

26
 It is important to highlight the fact that the coefficients of three independent

variables (SIZE, CAPINT, INVINT) maintain their sign and statistical significance at the

1% level for all three ETR measures (see Table 4). This observation can be regarded as

an important indication of the robustness of our regression results.

Turning now to the categorical variables (SECTOR, REGION, LEGALFORM,

EXPORTS), we also get some interesting results. First, sector seems to have a

significant impact on ETRs as most sectors appear to significantly differ from the

reference sector (Agriculture, Forestry and Fishing) at the 1% level. For example, firms

operating in sectors with the highest gross value added in the economy (e.g., Real Estate

Activities, Wholesale & Retail Trade etc.) face significantly higher effective tax rates

than firms in the reference sector. On the contrary, firms in the Agriculture, Forestry

and Fishing sector face the lowest ETRs in the Greek economy. As regards the location

in which the firm operates, it appears that it is also significantly associated with the

firm’s ETR. For example, firms that operate in Continental Greece (the region in which

Athens, the capital city of Greece, is located in) and Macedonia face higher ETRs than

firms in Thrace (the region used for reference). This variation is not surprising since

there are different law provisions and indications of favorable administrative treatment

for firms operating in specific areas of Greece (for a detailed presentation of sector and

location variables, see Tables A5 and A6 in the Appendix).

The firm’s legal form also seems to have a significant impact on ETR.

Specifically, limited liability companies (EPE) appear to face higher ETRs than public

limited liability companies (AE). Considering that the tax law framework was almost

the same for these two types of firms in the reference period, this difference could be

attributed to the fact that the directors of the public limited liability companies are

27
accountable to the shareholders to a greater extent than the directors of limited liability

companies who are usually simultaneously the sole shareholders of the company. In this

context, public limited liability companies most likely engage in aggressive tax

planning activities in an effort to reduce the firm’s tax burden and maximize the

shareholders’ wealth.

Finally, the association between ETRs and whether the firm exports or not is, in

general, insignificant.

6.3. The effect of the financial crisis period on ETRs

The examination of the crisis variables also leads to some interesting results. At

first, the CRISIS variable has a positive coefficient, with varying, though, statistical

significance. This result denotes that, ceteris paribus, firms’ ETRs increased in the

period after the beginning of the financial crisis (2008-2014), compared with the pre-

crisis period (2000-2007), proving that, in accordance with hypothesis H5, the financial

crisis period affected significantly firms’ ETRs.

This result comes as no surprise taking into account the extent of the legislative

changes that occurred after the beginning of the financial crisis in Greece and especially

after the signing of the first stability support program for Greece (see Section 3).

Investigating further this relationship, we substituted the CRISIS variable with

two dummy variables in order to split the period under consideration into three sub-

periods: the pre-crisis period (2000-2007), the period exactly after the beginning of the

financial crisis (2008-2009) and the period after the signing of the first Memorandum of

Economic and Financial Policies between Greece and the European Commission, the

European Central Bank and the International Monetary Fund (2010-2014). Based on

equation (1), we estimated then another multiple regression, the results of which (see

28
Table A10) confirm that the ETRs increased in the period after the beginning of the

financial crisis. We further found that the regression coefficient was about 9% higher in

the third period (2010-2014) compared to the second period (2008-2009), a finding that

shows that ETRs were even higher in the period after the signing of the first stability

support program for Greece.

We can therefore confirm that the sign of this relationship remains stable

throughout the financial crisis period and is furthermore strengthened after the

implementation of the stability support programs.

This finding can be regarded reasonable if one considers the legislative changes

and the intensive efforts of the tax authorities to meet the tax revenue targets set by the

country’s creditors.13 Among others, the conduction of tax audits based on a risk –

analysis system, the self-control procedures including the Tax-Certificates issued by

certified auditors as well as the obligation of tax practitioners to exclude the firms’ non-

tax-deductible expenses, the introduction of the Public Prosecutor for Financial Crimes,

the obligatory payment of business transactions through the banking system and the

abolishment of banking secrecy do not facilitate tax evasion and may, in particular,

explain why the ETRs are higher in Greece after the beginning of the financial crisis.

Regardless of the above, we need to highlight that, from a macroeconomic point

of view, the corporate income tax revenue (either measured as an absolute number or as

a percentage of the overall tax revenue) dropped substantially in the period after the

13
We do not take into account the several changes in the political landscape in Greece during the
financial crisis period, as the government’s fiscal policy was always in accordance with the creditor’s
demands and remained therefore mostly unchanged especially during the period 2010-2014.

29
beginning of the financial crisis.14 This reduction can be explained by the general

collapse of business activity or the increased number of firms that went out of business.

It is, though, indicative that the mix of measures that the Greek government decided to

take, in line with the country’s creditors, cannot be characterized as efficient,

irrespective of the fact that our results show that ETRs (examined on a strictly

microeconomic basis) increased in the period after 2007.

With respect to the hypothesis H5a, we seek to examine how the association

between the main independent variables and ETRs changed after the beginning of the

financial crisis. To this end, we included in equation (1) four interaction terms that have

been formed by multiplying the CRISIS dummy variable by each of the main

independent variables (SIZE, LEVERAGE, CAPINT, INVINT). Interpreting these results,

we can at first highlight that three out of the four interaction terms (CRISIS*SIZE,

CRISIS*CAPINT and CRISIS*INVINT) are significant at the 1% level for ETR1 and

ETR2 and significant at the 1% or 5% level for the ETR3 measure.

In particular, CRISIS*SIZE is negative and significant (p < 0.01 for ETR1),

implying that the effect of SIZE on ETRs decreased in the sub-period after the beginning

of the financial crisis. In this context, larger firms benefited after the beginning of the

financial crisis, as a unit increase of the SIZE measure in the period 2008-2014 leads to

a smaller increase of the ETR, in comparison with the pre-crisis period. This result can

be attributed to the fact that these firms may have decided to engage more aggressively

in tax planning in their effort to ensure that they will not pay more than the tax law

requires in the financial crisis period.

14
Statistics were retrieved from https://www.minfin.gr/web/guest/proupologismos (Yearly State
Budgets).

30
 Moreover, CRISIS*INVINT is also negative and significant (p<0.01 for ETR1)

suggesting that inventory intensive firms enjoyed a tax benefit in the sub-period after

the beginning of the financial crisis. On the other hand, CRISIS*CAPINT is positive and

significant (p<0.01 for ETR1) which means that firms with higher degrees of investment

in fixed assets encountered a lower decrease in their ETRs in the 2008-2014 period in

comparison with the pre-crisis period. Inventory-intensive firms seem to be better able

to adapt in the sub-period after the beginning of the financial crisis in comparison with

capital intensive firms. This may be due to the fact that capital intensive firms are

investing in the long-term and cannot easily alter their activities to reduce their taxable

income and their income tax.

Finally, CRISIS*LEVERAGE is statistically insignificant preventing us from any

meaningful inference.

Based on the above discussion, we also need to note that the principle of tax

equity is still under question after the beginning of the financial crisis in Greece.

Specifically, and despite the extensive legislative changes that have been adopted, there

exist a number of factors (such as the firm’s size and its investment choices) that have

an impact on the firms’ ETRs. It is exactly that fact that drives the tax system away from

the goal of tax equity as larger firms or firms that prefer to invest in their inventory

appear to be in a privileged position.

6.4. Comparing results of a pooled – OLS regression

To assess the possible bias that we would have experienced without using a

Hausman-Taylor random effects model, we also estimated a pooled OLS regression for

all three ETR measures, an estimation method that was widely used in the previous

literature. This estimation, though, ignores the potential specification problems

31
described in the subsection 6.1 resulting, as a matter of fact, in different estimations in

terms of coefficients’ sign, magnitude and statistical significance. We believe that this

methodology may have been the main reason for the conflicting results of previous

studies. Due to space limitations, detailed results of this analysis are available upon

request.

7. CONCLUSION

In this paper, we examined the determinants of the variability in corporate

effective tax rates (ETRs) before and during the financial crisis period (2000-2014) in

Greece using elements of firms’ financial statements.

We find that that the corporate income tax burden in Greece is unequally

distributed across different types of firms as we find strong evidence that specific firm

characteristics such as the firm’s size, its financial leverage and its capital and inventory

intensity, influence the level of the corporate effective tax rates. More specifically, we

find that larger firms in Greece face higher ETRs than smaller ones, a result that implies

that these firms are not capable of exploiting their power to reduce their tax burden, at

least not to a considerable degree. The results also indicate that the expected negative

association between ETR and financial leverage can be confirmed only for the under-

leveraged firms in Greece, a finding that comes as no surprise taking into account the

optimal level of leverage that the firms seek to achieve considering the tax benefits of

debt and the bankruptcy penalties (trade-off theory). Moreover, the firm’s capital

intensity is negatively associated with ETR, confirming the hypothesis that the tax

framework is favorable for firms that invest in fixed assets. A negative and significant

association also exists between inventory intensity and ETR, a finding that denotes that

firms that invest in their inventory face, ceteris paribus, lower ETRs. Furthermore, there

32
exist significant associations between ETR and statutory corporate income tax rates, the

reporting of financial losses in the preceding year, the sector in which the firm operates,

its location and its legal form. With regard to the effect of the financial crisis period on

ETRs, we observed that the firms’ ETRs increased in the sub-period after the beginning

of the financial crisis (2008-2014), a finding that can be considered reasonable if one

considers the legislative changes and the intensive efforts of the tax authorities to meet

the tax revenue targets set by the country’s creditors. Analyzing further this effect, we

concluded that larger firms, as well as inventory intensive firms, benefited in the sub-

period after the beginning of the financial crisis. On the contrary, firms with higher

degrees of investment in fixed assets encountered a lower decrease in their ETRs in the

same period.

Policymakers can build on this analysis whether their goal is to secure tax

revenue or to remove distortions that undermine the neutrality of the tax system and

adversely affect the creation of a more investment-friendly environment. At first,

emphasis should be put on firms that face lower ETRs on a regular basis; a broadening

of the tax base is of crucial importance especially during the recession period that

Greece is currently going through. Moreover, firms that face regularly higher ETRs

should be as well brought into focus as the presence of disincentives to investment in

specific activities must be made explicit to policymakers. Given the conclusion reached

that the corporate income tax in Greece is not levied neutrally, it needs to be

investigated whether this “departure” from neutrality is desirable (for example to

promote specific activities) or if it has occurred over time and needs to be adjusted.

Moreover, the results of our analysis can help policymakers, both inside and outside

Greece, to assess the effectiveness of their interventions and estimate whether these

33
interventions are sufficient, towards the right direction or not enough. Finally, the

preceding analysis could also be useful from the firms’ point of view, as the factors that

determine the corporate ETRs such as the sector and location in which a firm operates

should be taken into consideration by firms investing or planning to invest in Greece.

Several issues can be incorporated in future research. Firstly, this study could be

extended to general and limited partnerships that make up the majority of firms

operating in Greece. Given that these data are not publicly available as these firms are

not obliged to publish their financial statements, that kind of research requires data

extraction from various administrative sources (e.g., Ministry of Finance, General

Secretariat for Public Revenue). Secondly, given the fact that there are sectors of the

economy and regions of the country that appear to be more resilient or vulnerable to the

financial crisis (see, for example, Psycharis et al., 2014), an issue that can be further

explored is the way the ETRs and their determinants vary before and during the

financial crisis in these specific sectors and regions. Thirdly, apart from the independent

and control variables that we incorporated in our study, there may also exist other

factors that have an impact on corporate ETRs. For example, the effect of the firm’s

ownership structure (e.g., whether it is a domestic or a foreign-owned firm), its

international operations, its involvement in research and development or its auditor and

tax advice expenses were not examined in this study due to data constraints. Future

research could address these issues too.

REFERENCES

Adhikari, A., Derashid, C., and Zhang, H., 2006. “Public policy, political connections,
and effective tax rates: Longitudinal evidence from Malaysia.” Journal of
Accounting and Public Policy 25(5), 574-595.

34
Bank of Greece, 2014. “The chronicle of the great crisis 2008 - 2013” Available at:
http://www.bankofgreece.gr/BogEkdoseis/The%20Chronicle%20Of%20The%20Gre
at%20Crisis.pdf

Bernard, V., and Noel, J., 1991. “Do inventory disclosures predict sales and earnings?”
Journal of Accounting, Auditing, and Finance 6, 145-181.

Buijink, W., Janssen, B., and Schols, Y., 1999. “Corporate effective tax rates in the
European Union.” Maastricht, MARC research report. Available at
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.40.7361&rep=rep1&type=
pdf

Clotfelter, C.T., 1983. “Tax evasion and tax rates: An analysis of individual returns.”
The Review of Economics and Statistics 65(3), 363-373.

Cloyd, B., Pratt, J., and Stock, T., 1996. “The use of financial accounting choice to
support aggressive tax positions: Public and private firms.” Journal of Accounting
Research 34(1), 23-43.

Code for Books and Records of 1992. Pub. L. No. 186, A 84 Government Gazette.
1621-1641 (2012). Retrieved January 20, 2016, from
http://www.forin.gr/laws/law/6/kwdikas-bibliwn-kai-stoixeiwn

Code of Tax Reporting of Transactions of 2012. Pub. L. No. 4093, A 167 Government
Gazette. 5543-5559 (2014). Retrieved January 20, 2016, from
http://www.forin.gr/laws/law/16/kwdikas-forologia-eisodhmatos

Crabbe, K., 2010. “The impact of the auditor and tax advice on the effective tax rate.”
University of Leuven, Department of Accountancy, Finance and Insurance.
Available at https://lirias.kuleuven.be/bitstream/123456789/289353/1/AFI_1050.pdf

Derashid, C., and Zhang, H., 2003. “Effective tax rates and the industry policy
hypothesis: Evidence from Malaysia.” Journal of International Accounting, Auditing
and Taxation 12, 45-62.

Dyreng, S.D., Hanlon, M., and Maydew, E.L., 2010. “The Effects of Executives on
Corporate Tax Avoidance”. The Accounting Review 85(4), 1163-1189.

European Commission, DG Taxation & Customs Union (2016). Taxation Trends in the
European Union. Data for the EU Member States, Iceland and Norway: 2016
edition. Available at:
http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxatio
n/gen_info/economic_analysis/tax_structures/2016/econ_analysis_report_2016.pdf

Frank, M.M., Lynch, L.J., and Rego, S.O., 2009. “Tax reporting aggressiveness and its
relation to aggressive financial reporting.” The Accounting Review 84(2), 467-496.

35
General Secretariat for Public Revenue, 2015. Statistics of Tax Audits and Collections
by Departmental Unit. Retrieved December 21, 2015, from
http://www.publicrevenue.gr/kpi/public/report/2015/18/0000/

Graham, J.R., and Tucker, A.L., 2006. “Tax shelters and corporate debt policy.”
Journal of Financial Economics 81(3), 563-594.

Greek Accounting Standards of 2014. Pub. L. No. 4308, A 222 Government Gazette.
7651-7741 (2015). Retrieved January 20, 2016, from
http://www.forin.gr/laws/law/9/kwdikas-forologikhs-apeikonishs-sunallagwn

Greek tonnage tax regime of 1975. Pub. L. No. 27, A 77 Government Gazette. 399-405
(2015). Retrieved January 20, 2016, from http://www.forin.gr/laws/law/2442/peri-
forologias-ploiwn

Guenther, D.A., Matsunaga, S.R., and Williams, B.M., 2013. “Tax avoidance, tax
aggressiveness, tax risk and firm risk.” Working Paper. Available at:
https://business.illinois.edu/accountancy/wp-content/uploads/sites/12/2014/10/Tax-
2013-Guenther.pdf

Gupta, S., and Newberry, K., 1997. “Determinants of the variability in corporate
effective tax rates: Evidence from longitudinal data.” Journal of Accounting and
Public Policy 16, 1-34.

Harris, M.N., and Feeny, S., 2003. “Habit persistence in effective tax rates.” Applied
Economics 35(8), 951-958.

Hausman, J.A., and Taylor, W.E., 1981. “Panel data and unobservable individual
effects.” Econometrica 49, 1377-1398.

Heshmati, A., Johansson, D., and Bjuggren, C.M., 2010. “Effective corporate tax rates
and the size distribution of firms.” Journal of Industry, Competition and Trade 10(3-
4), 297-317.

Holland, K., 1998. “Accounting policy choice: The relationship between corporate tax
burdens and company size.” Journal of Business Finance & Accounting 25, 265-288.

IASB – see International Accounting Standards Board 2016.

Income Tax Code of 1994. Pub. L. No. 2238, A 151 Government Gazette. 1767-1898
(2013). Retrieved January 20, 2016, from http://www.forin.gr/laws/law/17/kurwsh-
tou-kwdika-forologias-eisodhmatos

Income Tax Code of 2013. Pub. L. No. 4172, A 167 Government Gazette. 2457-2516
(2015). Retrieved January 20, 2016, from http://www.forin.gr/laws/law/16/kwdikas-
forologia-eisodhmatos

36
International Accounting Standards Board, 2016a. International Accounting Standard
16. “Property, plant and equipment”. Retrieved January 20, 2016, from Eur-Lex
(http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02008R1126-
20150112).

International Accounting Standards Board, 2016b. International Accounting Standard 2.

“Inventories”. Retrieved January 20, 2016, from Eur-Lex (http://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02008R1126-20150112).

International Accounting Standards Board, 2016c. International Accounting Standard

12. “Property, plant and equipment”. Retrieved January 20, 2016, from Eur-Lex
(http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02008R1126-
20150112).

Investment Law of 2011. Pub. L. No. 3908, A 8 Government Gazette. 39-54 (2015).
Retrieved January 20, 2016, from http://www.forin.gr/laws/law/2450/law-3908-2011

Janssen, B., 2005. “Corporate effective tax rates in the Netherlands.” De Economist
153(1), 47-66.

Janssen, B., and Buijnk, W., 2000. “Determinants of the variability of corporate
effective tax rates: Evidence for the Netherlands.” MARC Working Paper, 2000-08.

Kern, B.B., and Morris, M.H., 1992. “Taxes and firm size: The effect of tax legislation
during the 1980s.” Journal of the American Taxation Association 14(1), 80-96.

Kim, A., and Limpaphayom, P., 1998. “Taxes and firm size in Pacific-Basin emerging
economies.” Journal of International Accounting, Auditing and Taxation 7(1), 47-68.

Kraus, A., and Litzenberger, R.H., 1973. “A state-preference model of optimal financial
leverage.” The Journal of Finance 28(4), 911-922.

Mills, L., and Newberry, K.J., 2001. “The influence of tax and nontax costs on book-tax
reporting differences: Public and private firms.” Journal of the American Taxation
Association 23, 1-19.

Nicodeme, G., 2001. “Computing effective corporate tax rates: Comparison and
results.” European Commission, Economic Papers 153.

Nicodeme, G., 2002. “Sector and size effects on effective corporate taxation.” European
Commission, Economic papers 175.

Nicodeme, G., 2007. “Do large companies have lower effective corporate tax rates? A
European survey.” CEB Working Paper, 07-001, Université Libre de Bruxelles,
Solvay Business School, Centre Emile Bernheim (CEB).

Porcano, T., 1986. “Corporate tax rates: Progressive, proportional, or regressive.”

Journal of the American Taxation Association 7(2), 17-31.

37
Psycharis, Y., Kallioras, D., and Pantazis, P., 2014. “Economic crisis and regional
resilience in Greece.” Regional Science Policy & Practice 6(2), 121-141.

Rego, S.O., 2003. “Tax-Avoidance activities of U.S. multinational corporations.”

Contemporary Accounting Research 20(4), 805-833.

Richardson, G., and Lanis, R., 2007. “Determinants of the variability in corporate
effective tax rates and tax reform: Evidence from Australia.” Journal of Accounting
and Public Policy 26, 689-704.

Siegfried, J.J., 1972. “The relationship between economic structure and the effect of
political influence: Empirical evidence from the corporation income tax program.”
PhD. Dissertation, University of Wisconsin.

Stickney, C.P., and McGee, V.E., 1982. “Effective corporate tax rates: The effect of
size, capital intensity, leverage, and other factors.” Journal of Accounting and Public
Policy 1(2), 125-152.

Vandenbussche, H., and Tan, C., 2005. “Taxation of multinationals: Firm level
evidence for Belgium.” LICOS Discussion Paper, No. 160.

Vandenbussche, H., Crabbe, K., and Janssen, B., 2005. “Is there regional tax
competition? Firm level evidence for Belgium.” De Economist 153(3), 257-276.

Watts, R.L., and Zimmerman, J.L., 1986. Positive Accounting Theory, Prentice-Hall,
London

Wilkie, P., 1988. “Corporate average effective tax rates and inferences about relative tax
preferences.” Journal of the American Taxation Association 10(1), 75-88.

Wilkie, P.J., and Limberg, S.T., 1990. “The relationship between firm size and effective
tax rates: A reconciliation of Zimmerman (1983) and Porcano (1986).” Journal of the
American Taxation Association 11(1), 76-91.

Zimmerman, J., 1983. “Taxes and firm size.” Journal of Accounting and Economics 5,
119-149.

38
TABLES

Table 1
Sample Construction
All firms in ICAP Databank 53,235
- Firms with missing data and/or no continuous activity in
43,362
the reference period
- Financial Firms, Insurance Companies 228

- Firms 4,709
o with negative ETRs
o with negative tax (tax refund) and negative
income (loss)
o with ETRs>1

Final sample (number of firms) 4,936

Final sample (number of observations) 74,040

Table 2
Descriptive Statistics
Two -
Two - sample
Standard sample t- Wilcoxon -
Mean Median Min Max
Deviation value test Mann -
(1)
Whitney test
(1)

ETR1 0.152 0.166 0.096 0 1 30.191*** 28.682***

ETR2 0.144 0.161 0.067 0 1 32.237*** 29.894***
ETR3 0.088 0.11 0.009 0 1 29.408*** 27.492***
SIZE 14.28 1.41 14.22 7.396 20.718 -40.062*** -38.626***
LEVERAGE 0.066 0.234 0 0 46.551(2) -11.831*** -11.650***
CAPINT 0.41 0.315 0.347 0 1 -2.250** -0.552
INVINT 0.131 0.177 0.427 0 0.999 3.272*** 8.137***
Notes: ETR1 is defined as the ratio of worldwide income tax payable to net income before taxes. ETR2, is
defined as the ratio of worldwide income tax payable to operating result. ETR3, is defined as the ratio of
worldwide income tax payable to earnings before interest, taxes, depreciation and amortization
(EBITDA). SIZE is measured as the natural logarithm of total assets. LEVERAGE is measured as the ratio
of medium – long –term liabilities to total assets. CAPINT is measured as the ratio of net fixed assets to
total assets. INVINT is measured as the ratio of end-year’s inventory to total assets. ***, ** and * indicate
significance at the 1%, 5% and 10% level, respectively.
(1): The two – sample tests were conducted as a hypothesis test for the difference between the means of
the dependent and independent variables before and after the beginning of the financial crisis (periods
2000 – 2007 and 2008 – 2014, respectively). The tests were conducted after the calculation of the
dependent and independent variables’ means for each firm for the two periods under consideration.

39
(2): 62 out of 74,040 LEVERAGE observations (about 0.08% of the total number of observations) are
greater than 1, referring to firms with high accumulated losses in their balance sheets and thus, medium –
long term liabilities greater than their total assets.

40
 Table 3
Pairwise Correlations among variables
ETR1 ETR2 ETR3 SIZE LEVERAGE CAPINT INVINT
ETR1 1.000
ETR2 0.910*** 1.000
ETR3 0.780*** 0.822*** 1.000
SIZE 0.141*** 0.137*** 0.065*** 1.000
LEVERAGE -0.097*** -0.099*** -0.125*** 0.136*** 1.000
CAPINT -0.344*** -0.337*** -0.360*** -0.045*** 0.135*** 1.000
INVINT 0.132*** 0.128*** 0.065*** 0.152*** -0.045*** -0.463*** 1.000
Notes: ***, ** and * indicate significance at the 1%, 5% and 10% level, respectively.

41
 Table 4
Panel A: Hausman – Taylor Estimates of effective tax rates on various firm
characteristics over the period 2000 - 2014 (n = 4,936)

Equation (1)
Predicted
Sign ETR1 ETR2 ETR3

-0.3507*** -0.3621*** -0.2313***

Intercept +/-
(-9.89) (-10.86) (-7.70)
0.0255*** 0.0267*** 0.0162***
SIZE +
(11.29) (12.68) (7.99)
-0.0309 -0.0297 -0.0171
LEVERAGE -
(-1.60) (-1.59) (-1.38)
-0.1248*** -0.1349*** -0.1288***
CAPINT -
(-17.17) (-18.95) (-21.78)
-0.0317*** -0.0404*** -0.0706***
INVINT +
(-2.62) (-3.45) (-7.43)
0.0080* 0.0088 0.0166
ROA +
(1.66) (1.64) (1.27)
0.4207*** 0.3983*** 0.3760***
STR +
(27.83) (26.84) (35.60)
- 0.0944*** -0.0866*** -0.0472***
NLO -
(-54.20) (-51.22) (-38.80)
0.0288* 0.0512*** 0.0024
CRISIS +/-
(1.85) (3.34) (0.22)
-0.0037*** -0.0060*** -0.0016**
CRISIS * SIZE +/-
(-3.41) (-5.58) (-2.08)
0.0255 0.0242 0.0148
CRISIS * LEVERAGE +/-
(1.34) (1.31) (1.23)
0.0500*** 0.0605*** 0.0416***
CRISIS * CAPINT +/-
(9.65) (12.07) (11.30)
-0.0354*** -0.0273*** -0.0174**
CRISIS * INVINT +/-
(-3.73) (-2.88) (-2.44)

Sector 11 0.0881*** 0.0936*** 0.0923***

+/-
(Real Estate Activities) (7.07) (7.68) (9.78)

42
 Sector 6
0.0780*** 0.0778*** 0.0493***
(Wholesale & Retail +/-
(7.86) (8.01) (7.59)
Trade)
Sector 3 0.0571*** 0.0611*** 0.0302***
+/-
(Manufacturing) (5.74) (6.26) (4.62)
Sector 14
(Public administration
and defence; +/- 0.0646** 0.0682** 0.0636**
(1.99) (2.01) (2.19)
compulsory social
security)
Region 4 0.0602*** 0.0558*** 0.0358***
+/-
(Continental Greece) (6.45) (5.75) (5.46)
Region 2 0.0467*** 0.0408*** 0.0197***
+/-
(Macedonia) (4.86) (4.09) (2.91)
0.0240*** 0.2283*** 0.0309***
LEGAL FORM +/-
(4.89) (4.71) (6.61)
-0.0026 -0.0051 -0.0080***
EXPORTS -
(-0.70) (-1.44) (-2.64)
Sargan-Hansen Test 1.011 3.055 0.658
[p-value] [0.3146] [0.0805] [0.4173]
R2 0.2218 0.2163 0.2265
No. of firms 4,928 4,928 4,927
No. of observations 62,800 62,796 53,176

Panel B: t-statistics for hypotheses tests of significance of independent

variables in the period after the beginning of the financial crisis in Greece
(2008-2014) based on the coefficient estimates reported in Table 4

Variable Hypothesis ETR1 ETR2 ETR3

SIZE α1 + α11=0 10.29*** 10.65*** 7.52***

LEVERAGE α2+α12=0 -0.25 -0.26 -0.11

CAPINT α3+α13=0 -3.38*** -3.47*** -4.06***

INVINT α4+α14=0 -5.48*** -5.71*** -7.41***

Notes: Dependent variables: ETR1, ETR2, ETR3. ETR1 is defined as the ratio of worldwide income tax
payable to net income before taxes; ETR2, is defined as the ratio of worldwide income tax payable to
operating result; ETR3, is defined as the ratio of worldwide income tax payable to earnings before

43
interest, taxes, depreciation and amortization (EBITDA). ETRs cannot be defined when the
denominator (net income before taxes, operating result or EBITDA) is equal to zero. Independent and
control variables: SIZE, CAPINT, INVINT, CAPINT, STR, ROA. SIZE is measured as the natural
logarithm of total assets; LEVERAGE is measured as the ratio of medium-long-term liabilities to total
assets; CAPINT is measured as the ratio of net fixed assets to total assets; INVINT is measured as the
ratio of end-year’s inventory to total assets; STR represents the year’s statutory tax rate. ROA is
measured as the ratio of net income before taxes to total assets. Categorical variables: NLO, SECTOR,
REGION, LEGALFORM, EXPORTS, CRISIS. The variable NLO equals 1, if the firm reports net
financial losses in year t-1, 0 otherwise. The variable CRISIS equals 1, if year = 2008-2014, 0
otherwise. For an overview of the variables, see Tables A1 – A3 in the Appendix. The sectors
presented in this table are the ones with the highest gross value added in the economy. The regions
presented in this table are the most-populated regions of Greece. For a detailed sector – location
analysis, see tables A5 and A6 in the Appendix.
Interaction terms: CRISIS*SIZE, CRISIS*LEVERAGE, CRISIS*CAPINT, CRISIS*INVINT.
LEVERAGE, SIZE, CAPINT, INVINT, STR, NLO, ROA and the interaction terms are treated as
endogenous variables.
***, ** and * indicate significance at the 1%, 5% and 10% level, respectively. t-statistics are reported
in parentheses (robust standard errors were used so as to correct for the presence of heteroscedasticity
and autocorrelation within panels). Coefficients are rounded to the fourth decimal place.
Variables used as instruments: SECTOR, REGION, LEGALFORM, EXPORTS, CRISIS
The validity of our instruments is tested by Sargan-Hansen test. The null hypothesis indicates that the
over-identified restrictions are valid (a p-value greater than 0.01 signifies that the null is not rejected at
1% level of significance).

44
APPENDIX
Table A1
Variables
ETR1 Worldwide Income Tax Payable / Net Income Before Taxes
ETR2 Worldwide Income Tax Payable/ Operating Result
ETR3 Worldwide Income Tax Payable/ EBITDA
SIZE LN (Assets)
LEVERAGE Medium – Long term liabilities / Total Assets
CAPINT Net Fixed Assets / Total Assets
INVINT Inventory / Total Assets
ROA Net Income Before Taxes / Total Assets
STR Statutory Corporate Income Tax Rate
NLO 1, if firm reports financial losses in year t-1, 0 otherwise
SECTOR See Table A2
REGION See Table A3
CRISIS 1, if year = 2008 - 2014, 0 if year = 2000 - 2007
CRISIS * SIZE Interaction Term
CRISIS * LEVERAGE Interaction Term
CRISIS * CAPINT Interaction Term
CRISIS * INVINT Interaction Term
LEGALFORM 1 for Limited Liability Companies (EPE), 0 for Public Limited
Liability Companies (AE)
EXPORTS 1, if the firm is exporting, 0 otherwise

Table A2
Sectors

Sector 1 Agriculture, Forestry and Fishing

Sector 2 Mining and Quarrying
Sector 3 Manufacturing
Sector 4 Electricity, gas, steam and air conditioning supply
Sector 5 Water supply; sewerage, waste management and remediation activities
Sector 6 Wholesale and retail trade; repair of motor vehicles and motorcycles
Sector 7 Transportation and Storage
Sector 8 Accommodation and food service activities
Sector 9 Information and Communication
Sector 10 Financial and Insurance Activities
Sector 11 Real Estate Activities
Sector 12 Professional, scientific and technical activities
Sector 13 Administrative and support service activities
Sector 14 Public administration and Defence; compulsory social security
Sector 15 Human health and social work activities
Sector 16 Arts, Entertainment and Recreation
Sector 17 Other Service Activities
Sector 18 Education
Sector 19 Construction
Table A3

45
 Regions

Region 1 Thrace
Region 2 Macedonia
Region 3 Epirus
Region 4 Continental Greece
Region 5 Peloponnese
Region 6 Aegean Islands
Region 7 Ionian Islands
Region 8 Crete
Region 9 Thessaly

Table A4
Statistics for Firms’ Sales Growth & Inventory Growth
Variable Obs Mean
Sales Growth 63,351 39.48%
Inventory Growth 48,885 88.15%
Notes: Sales Growth is calculated as the annual percentage change of firm’s turnover. Inventory Growth is
calculated as the annual percentage change of firm’s end-of-year’s inventory.

Table A5
Hausman – Taylor Estimates of effective tax rates on various sectors over the period
2000 - 2014 (n = 4,936)
Equation (1)
Sector ETR1 ETR2 ETR3
0,0276 0,0464*** 0,0177
2
(1,43) (2,57) (1,35)
0,0571*** 0,0611*** 0,0302***
3
(5,74) (6,26) (4,62)
0,0426 0,0685* 0,0433*
4
(1,33) (1,82) (1,84)
0,066*** 0,0814*** 0,0681***
5
(3,16) (3,42) (4,91)
0,078*** 0,0778*** 0,0493***
6
(7,86) (8,01) (7,59)
0,0484*** 0,0555*** 0,0445***
7
(3,96) (4,52) (4,83)

46
 0,0445*** 0,0518*** 0,0410***
8
(4,40) (5,23) (6,13)
0,0572*** 0,0587*** 0,0308***
9
(4,68) (4,81) (3,62)
0,0881*** 0,0936*** 0,0923***
11
(7,07) (7,68) (9,78)
0,0647*** 0,0678*** 0,0530***
12
(5,50) (5,88) (6,32)
0,0367*** 0,0381*** 0,0307***
13
(3,33) (3,54) (4,00)
0,0646** 0,0682** 0,0636**
14
(1,99) (2,01) (2,19)
0,1105*** 0,1125*** 0,0845***
15
(7,65) (8,03) (7,72)
-0,0088 -0,0039 0,0009
16
(-0,37) (-0,18) (0,07)
0,0462** 0,0523** 0,0247*
17
(2,18) (2,38) (1,92)
0,0946*** 0,0854*** 0,0459***
18
(5,88) (5,48) (3,94)
0,0511*** 0,0541*** 0,0471***
19
(4,50) (4,88) (5,93)

Notes: Dependent variables: ETR1, ETR2, ETR3. ETR1 is defined as the ratio of worldwide income tax payable
to net income before taxes; ETR2, is defined as the ratio of worldwide income tax payable to operating result;
ETR3, is defined as the ratio of worldwide income tax payable to earnings before interest, taxes, depreciation
and amortization (EBITDA). Sector 1 is the reference sector. For sectors’ definition, see Table A2.
***, ** and * indicate significance at the 1%, 5% and 10% level, respectively. t-statistics are reported in
parentheses (robust standard errors were used so as to correct for the presence of heteroscedasticity and
autocorrelation within panels). Coefficients are rounded to the fourth decimal place. For the rest Hausman –
Taylor estimates, see Table 4 and Table A6.

47
 Table A6
Hausman – Taylor Estimates of effective tax rates on various regions over the period
2000 - 2014 (n = 4,936)
Equation (1)

Region ETR1 ETR2 ETR3

0,0467*** 0,0408*** 0,0197***
2
(4,86) (4,09) (2,91)
0,0558*** 0,0558*** 0,0278***
3
(4,15) (4,00) (2,91)
0,0602*** 0,0558*** 0,0358***
4
(6,45) (5,75) (5,46)
0,0555*** 0,0512*** 0,0287***
5
(5,28) (4,70) (3,84)
0,0391*** 0,0321*** 0,0163**
6
(3,96) (3,14) (2,35)
0,0347*** 0,0265** 0,0141*
7
(3,32) (2,50) (1,90)
0,028*** 0,0226** 0,0097
8
(2,84) (2,23) (1,41)
0,0355*** 0,0310*** 0,0096
9
(3,31) (2,82) (1,28)

Notes: Dependent variables: ETR1, ETR2, ETR3. ETR1 is defined as the ratio of worldwide income tax payable to
net income before taxes; ETR2, is defined as the ratio of worldwide income tax payable to operating result; ETR3,
is defined as the ratio of worldwide income tax payable to earnings before interest, taxes, depreciation and
amortization (EBITDA). Region 1 is the reference region. For regions’ definition, see Table A3.
***, ** and * indicate significance at the 1%, 5% and 10% level, respectively. t-statistics are reported in
parentheses (robust standard errors were used so as to correct for the presence of heteroscedasticity and
autocorrelation within panels). Coefficients are rounded to the fourth decimal place. For the rest Hausman – Taylor
estimates, see Table 4 and Table A5.

48
 Table A7
The association between ETR and SIZE within different size-groups

ETR1
Very Small Small Medium/Large
Variable
Enterprises Enterprises Enterprises
0.0232*** 0.0239*** 0.0224***
SIZE
(6.14) (7.92) (6.25)

Notes: This table presents the association between ETR1 and SIZE within different size-groups. The size-groups
were determined based on the criteria specified in the Greek Accounting Standards (2014). Medium and large
enterprises were treated as one size group due to their relatively lower sample representation.
ETR1 is defined as the ratio of worldwide income tax payable to net income before taxes. SIZE is measured as the
natural logarithm of total assets. ***, ** and * indicate significance at the 1%, 5% and 10% level, respectively. t-
statistics are reported in parentheses (robust standard errors were used so as to correct for the presence of
heteroscedasticity and autocorrelation within panels).

Table A8
The association between ETR and LEVERAGE for under-leveraged and over-
leveraged firms

ETR1

Variable Under-leveraged firms Over-leveraged firms

-0.1153*** -0.0251
LEVERAGE
(-3.64) (-1.21)

Notes: This table presents the association between ETR1 and LEVERAGE for under-leveraged and over-
leveraged firms. The firms were classified into these two groups considering whether their average financial
leverage is above or below the total average in the reference period. ETR1 is defined as the ratio of worldwide
income tax payable to net income before taxes. LEVERAGE is measured as the ratio of medium–long–term
liabilities to total assets. ***, ** and * indicate significance at the 1%, 5% and 10% level, respectively. t-
statistics are reported in parentheses (robust standard errors were used so as to correct for the presence of
heteroscedasticity and autocorrelation within panels).

49
 Table A9
The association between ETR and LEVERAGE for under-leveraged firms
controlling for firm’s tax risk

ETR1
Variable Under-leveraged firms
-0.1153***
LEVERAGE
(-3.64)

Notes: This table presents the association between ETR1 and LEVERAGE for under-leveraged firms after
controlling for firm’s tax risk. ETR1 is defined as the ratio of worldwide income tax payable to net income
before taxes. LEVERAGE is measured as the ratio of medium-long-term liabilities to total assets. Tax risk is
measured as the standard deviation of the firm’s ETR over the reference period. ***, ** and * indicate
significance at the 1%, 5% and 10% level, respectively. t-statistics are reported in parentheses (robust standard
errors were used so as to correct for the presence of heteroscedasticity and autocorrelation within panels).

Table A10
The effect of the financial crisis period on firms’ ETRs

ETR1

0,0275*
CRISIS_SUB_PERIOD_1 (2008 – 2009)
(1,76)
0,0300*
CRISIS_SUB_PERIOD_2 (2010 – 2014)
(1,93)

Notes: This table presents the association of ETR1 with two dummy variables that substituted the CRISIS dummy
variable in equation (1) and split the reference period into three sub-periods.
ETR1 is defined as the ratio of worldwide income tax payable to net income before taxes.
The variable CRISIS_SUB_PERIOD_1 equals 1 if year = 2008-2009, 0 otherwise; the variable
CRISIS_SUB_PERIOD_2 equals 1 if year = 2010-2014, 0 otherwise. ***, ** and * indicate significance at the 1%,
5% and 10% level, respectively. t-statistics are reported in parentheses (robust standard errors were used so as to
correct for the presence of heteroscedasticity and autocorrelation within panels).

50