"Purpose – Extant literature investigating the tax payment behaviour of politically connected firms largely supports the notion that politically connected firms have tax sheltering incentives i.e., politically connected firms pay significantly less tax. Our paper adds to this stream of literature, by dividing politically connected firms in Pakistan into two groups i.e., civil connected and military connected.
Design/methodology/approach – The paper sheds light on the tax payment behavior of politically connected firms and provides evidence that the tax incentives of politically connected firms are shaped by the institutional structure and contextual factors.
Findings – The results indicate that civil (military) connected firms pay significantly lower (higher) tax than non-connected firms. The findings are robust to alternate proxies of tax and endogeneity concerns.
Originality/value – These results make a significant contribution to the existing literature examining the tax payment behaviour of politically connected firms by providing evidence suggesting that tax sheltering is not the only viable option for politically connected firms; rather, some groups of connected firms have tax under sheltering incentives. Our findings add to the political cost hypothesis and the signaling hypothesis in relation to tax payment incentives of politically connected firms."