1. Introduction

In an increasingly uncertain and competitive economic environment, firms require appropriate financial policies to maintain their competitive position, respond to unexpected changes, and exploit investment opportunities. Financial flexibility is therefore an important financial characteristic because it enables firms to preserve financing capacity and respond to unforeseen financial needs. Tax payments, however, represent a significant cash outflow and may reduce the resources available for investment, debt management, and other financial commitments. Consequently, managers may employ tax planning strategies, including aggressive tax reporting, to reduce or defer tax payments and preserve financial resources. Aggressive tax reporting can therefore have a direct implication for financial flexibility. By lowering the current tax burden, firms may retain additional cash and increase their ability to finance operations and investment opportunities internally. Nevertheless, excessive tax aggressiveness may expose firms to tax penalties, regulatory scrutiny, reputational risks, and agency conflicts. In this regard, audit committees constitute an important internal corporate governance mechanism. Their independence, financial expertise, gender diversity, size, and meeting frequency may enhance monitoring over financial and tax-related decisions. A high-quality audit committee may therefore constrain excessively aggressive tax strategies and modify their effects on firms’ financial flexibility. The present study contributes to this literature by simultaneously examining aggressive tax reporting quality, financial flexibility, and audit committee characteristics quality within the institutional setting of the Tehran Stock Exchange.

2. Methodology

The research is applied in terms of purpose, ex post facto in terms of temporal design, and descriptive-correlational in terms of nature. The statistical population consists of companies listed on the Tehran Stock Exchange during 1392–1402 (2013–2023). Based on the specified sampling criteria, 147 companies were selected, resulting in 1,617 firm-year observations. Required data were extracted from the Codal comprehensive database, Rahavard Novin, companies’ financial statements, and their accompanying explanatory notes. Excel 2013 and EViews 9 were employed for data preparation and statistical analysis.

Because financial flexibility is operationalized as a binary variable, panel logistic regression estimated by the maximum likelihood method was employed. Financial flexibility was measured based on the firm’s excess debt capacity. A firm was classified as financially flexible when it exhibited excess debt capacity for at least two consecutive years. Aggressive tax reporting quality was constructed using four indicators: the difference between declared and final tax, the difference between the statutory and effective tax rates, the difference between the ratio of taxable income to sales and the industry profitability ratio, and earnings management aimed at income minimization. These four indicators were aggregated to construct the aggressive tax reporting quality index.

Audit committee characteristics quality was measured using five dimensions: audit committee independence, gender diversity, committee size, meeting frequency, and members’ financial expertise. These components were combined into an overall audit committee characteristics quality index. The regression models also controlled for audit quality, fixed-asset investment intensity, inventory investment intensity, return on assets, and corporate social responsibility.

3. Results

The descriptive findings indicate that the mean aggressive tax reporting quality index was 0.396, while its median was 0.374. The mean audit committee characteristics quality was 0.643, with a median of 0.495. Furthermore, 1,186 observations, equivalent to 73.35 percent of the sample, were classified as financially flexible, whereas 431 observations, or 26.65 percent, were classified as non-flexible.

The results of the first hypothesis indicate that aggressive tax reporting quality has a positive and statistically significant effect on financial flexibility. The estimated coefficient for aggressive tax reporting quality was 0.284, with a z-statistic of 3.50 and a significance level of 0.0005. Accordingly, the first hypothesis was supported. This finding suggests that more aggressive tax reporting can contribute to greater financial flexibility, primarily by reducing or postponing tax-related cash outflows and preserving financial resources within the firm. The second hypothesis examined the moderating role of audit committee characteristics quality. The interaction coefficient between aggressive tax reporting quality and audit committee characteristics quality was 0.118 and statistically significant, with a z-statistic of 2.31 and a significance level of 0.0207. Although the interaction term is positive, comparison of the interaction effect with the direct coefficient of aggressive tax reporting indicates that stronger audit committee characteristics reduce the magnitude of the positive effect of aggressive tax reporting on financial flexibility. Thus, the second hypothesis was supported. The second model also produced a McFadden R² of 0.268, compared with 0.214 for the first model.

4. Discussion

The positive relationship between aggressive tax reporting quality and financial flexibility can be explained by the cash-flow consequences of taxation. When firms reduce or defer tax payments through aggressive tax planning and reporting practices, more cash remains available for operating requirements, debt obligations, and investment opportunities. Therefore, aggressive tax reporting may improve short-term financial flexibility by increasing internally available financial resources. However, this benefit should not be interpreted as an absence of risk because excessive tax aggressiveness can generate tax disputes, penalties, reputational costs, and other future financial consequences. The findings also demonstrate the importance of audit committee characteristics as a corporate governance mechanism. An audit committee with greater independence, financial expertise, appropriate size, gender diversity, and more frequent meetings can exercise stronger oversight over financial and tax decisions. Such monitoring can constrain excessive tax aggressiveness and prevent management from relying excessively on tax strategies merely to obtain short-term liquidity benefits. Consequently, although aggressive tax reporting may improve financial flexibility, effective audit committee oversight can moderate and reduce the strength of this relationship. The findings are consistent with the broader evidence discussed in the study concerning the role of corporate governance and audit committee characteristics in constraining aggressive tax behavior.

5. Conclusion

The study concludes that aggressive tax reporting quality is positively and significantly associated with financial flexibility among firms listed on the Tehran Stock Exchange. This finding indicates that tax-related strategies capable of reducing or postponing cash tax payments can provide firms with additional financial resources and thereby enhance their ability to respond to financial needs. At the same time, the results confirm that audit committee characteristics quality significantly moderates this relationship. Higher-quality audit committees can limit excessive reliance on aggressive tax strategies and establish a balance between the short-term financial benefits of tax reduction and the long-term requirements of transparency, accountability, and tax-risk management. From a managerial perspective, firms should not evaluate tax strategies solely on the basis of short-term tax savings. Instead, managers should consider their effects on liquidity, financing capacity, borrowing capacity, tax risk, and long-term financial flexibility. Boards of directors should also give greater attention to the independence, financial and accounting expertise, professional experience, gender diversity, and monitoring capacity of audit committee members. Strengthening the audit committee and enhancing coordination among financial management, internal audit, and the audit committee can improve oversight of tax policies and help ensure that aggressive tax strategies are implemented within an appropriate risk-management framework. Overall, the evidence suggests that tax reporting behavior is not merely a tax-related issue but an important component of corporate financial policy and corporate governance.