Corporate Social Responsibility,Tax Aggressiveness,and Firm Market Value

This paper examines the relationship of corporate social responsibility (CSR), tax aggressiveness, and firm market value. An economic model has been developed to show that profit‐maximization firms are willing to incur additional costs in CSR, such as paying more taxes, as long as they can differentiate their products from non‐CSR firms, and that socially conscious consumers will buy products from CSR firms at prices higher than those of non‐CSR firms. The empirical study in this paper indicates that the higher the CSR ranking of a firm, the less likely a firm is to engage in tax aggressiveness. It also indicates that a reputation of higher CSR will enhance firm market value. Using Canadian companies listed in the S&P/TSX 60 index, I find that both firms’ five‐year effective tax rates and annual effective tax rates are positively associated with their overall CSR scores as well as with their social scores. Firms’ five‐year effective tax rates are also positively associated with their governance index. I also find that firms’ overall CSR ranking and governance scores are positively associated with their market value.     

Tax Aggressiveness and Accounting Fraud

There are competing arguments and mixed prior evidence on whether firms that are aggressive in their financial reporting exhibit more or less tax aggressiveness. Our research contributes to resolving this issue by examining the association between aggressive tax reporting and the incidence of alleged accounting fraud. Relying on several proxies for tax aggressiveness to triangulate our evidence, we generally find that tax aggressive U.S. public firms are less likely to commit accounting fraud. However, we caution that our results are sensitive to how tax aggressiveness is measured. More specifically, four (two) of the five (three) proxies for firms’ effective tax rates (book‐tax differences) load positively (negatively) during the 1981–2001 period, implying that fraud firms are less tax aggressiveness. Our inferences persist when we isolate the 1995–2001 period in which accounting impropriety steeply rose and corporate tax compliance steeply fell. Moreover, we continue to find that tax aggressive firms are less apt to fraudulently manipulate their financial statements when we apply factor analysis to identify tax avoidance with a common factor extracted from the underlying proxies and match on propensity scores to ensure that the fraud and nonfraud samples have very similar nontax characteristics.     

The Effects of Public Venture Capital Investments on Corporate Governance: Evidence From IPO Firms in Emerging Markets

This study examines the impact of public venture capital (hereafter PVC) investments on corporate governance of initial public offering (hereafter IPO) firms in emerging markets. Using data collected from Taiwan PVC investments during 1996–2005, we analyse three corporate governance features in IPO firms: earnings management, board characteristics, and excess control by controlling shareholders. We find that PVC‐backed firms use fewer accounting accruals in their IPO financial statements than non‐PVC‐backed firms. This result suggests that PVC‐backed IPO firms engage in less earnings management than non‐PVC‐backed IPO firms. We also find PVC‐backed firms tend to set up their boards with fewer non‐independent directors and supervisors at IPO. This result indicates that PVC‐backed IPO firms have better board structures than non‐PVC‐backed IPO firms. Finally, we find that controlling shareholders are less likely to exert excess control in PVC‐backed firms than in non‐PVC‐backed firms. Overall, our results indicate that PVC investments add value to new IPO firms not only in financing their capital needs but also in creating better corporate governance structures in emerging markets.     

Analyst coverage and corporate tax aggressiveness

We examine the impact of analyst coverage on corporate tax aggressiveness. To address endogeneity concerns, we perform a difference-in-differences analysis using a setting which causes exogenous decreases in analyst coverage. Our tests identify a negative causal effect of analyst coverage on tax aggressiveness, suggesting that higher analyst coverage constrains corporate tax aggressiveness. Further cross-sectional variation tests find that this constraining effect on tax aggressiveness is more pronounced in firms with lower investor recognition and firms with more opaque information environments. Our results are consistent with the notion that higher analyst coverage increases the visibility of aggressive tax planning behavior as well as heightens analysts’ demand for more transparent information, which in turn reduces tax aggressiveness.     

Executive cash compensation and tax aggressiveness of Chinese firms

We examine the influence of corporate compensation policies on firms’ tax aggressiveness in an emerging market where executive compensation is primarily in cash form. Based on a hand-collected dataset of 958 firm-year observations of Chinese listed firms for the 2006–2012 period, we find that firms paying higher executive cash compensation are associated with lower tax aggressiveness. This relationship also holds for the excess cash compensation measures which control for executive shareholding, firm profitability, size, growth opportunity, and board independence. We further document that mutual funds ownership pressure firms paying higher compensation to reduce their tax aggressiveness, suggesting adverse selection by mutual funds on firms exhibiting risky tax avoidance activities. High leverage offsets the negative link between cash compensation and tax aggressiveness, indicating a complementary effect between debt and tax avoidance, and, hence, suggesting that creditor monitoring is weak. These results are robust to the system-GMM estimation, which simultaneously account for the endogeneity of executive compensation, tax aggressiveness, ownership and control, leverage, and corporate governance. Our findings on Chinese firms have important policy implications for developing countries around the world with concentrated ownership structure, weak institutional environment, widespread corruption, ineffective rule of law, and ongoing significant social and political transformation.     

Overconfidence,CEO Awards,and Corporate Tax Aggressiveness

Theory and prior research suggest that overconfidence leads managers to overestimate their own ability to generate returns, leading to riskier corporate policies. We use a novel dataset of media awards as an exogenous shock to overconfidence to test whether award‐winning CEOs adopt more aggressive corporate tax policies. Using propensity score matching and a difference‐in‐difference design, we find strong evidence that firms with an award‐winning CEO exhibit significantly greater tax aggressiveness following the award. Overall, our results suggest that CEO overconfidence has a meaningful impact on corporate tax policy.     

An examination of firms’ responses to tax forgiveness

This study uses state tax amnesties to examine how firms respond to forgiveness—particularly repeated forgiveness—by a taxing authority. We posit that tax forgiveness programs alter taxpayer perceptions of the probability of detection by enforcers or the probability of future forgiveness programs, either of which could affect future tax aggressiveness. We find that firms headquartered in an amnesty-granting state increase state income tax aggressiveness following the first instance of tax amnesty, relative to control firms in other states. Moreover, we find evidence that tax aggressiveness incrementally increases with each additional repetition of a tax amnesty. Finally, we find that the effect of amnesties on tax aggressiveness is more prominent for small firms, which face less scrutiny and for which the tax aggressiveness measures are less confounded. Our findings suggest that repeated programs of tax forgiveness have increasingly negative implications for corporate tax collections.     

The effects of board gender diversity on a firm's risk strategies

We study whether board gender diversity (BGD) affects corporate risk strategies. Specifically, we investigate the association between BGD and firms’ reputation risk and financial risk. Using S&P data from 1997 to 2013, we find that BGD is negatively associated with tax avoidance, suggesting firms with gender‐diverse boards are more cautious about potential reputation risks associated with aggressive tax strategies. However, we find that BGD is positively associated with firms’ financial risk. The combined findings illustrate that BGD aligns a firm's risk exposure closer to risk‐neutral shareholders’ preferences by reducing reputation risk exposure while enabling necessary financial risk exposure.     

Does Internal Corporate Governance Complement or Substitute for External Auditing? Evidence from China's Anti‐corruption Campaign

Two competing hypotheses have been developed for the relationship between internal corporate governance and external auditing. One proposes a complementary relationship, while the other suggests it is substitutable. This study takes advantage of China's recent anti‐corruption campaign as a quasi‐natural experiment to explore this relationship. Using a difference‐in‐differences approach, we find that, after the campaign, internal corporate governance improved more in SOEs (state‐owned enterprises) than in non‐SOEs. SOEs were less likely to choose Big 10 auditors after the campaign, while audit firms assigned less experienced auditors to their SOE client firms and charged lower audit fees. These effects were more pronounced in SOEs that exhibited greater improvement in corporate governance. Overall, we find the anti‐corruption campaign improved corporate governance in SOEs but, at the same time, reduced external audit quality, which supports the substitution view. We argue that this result might be driven by the fact that SOEs have limited demand for high‐quality accounting information because the Chinese government maintains strong control over the capital markets.     

The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis

This paper examines the impact of board of director oversight characteristics on corporate tax aggressiveness. Based on a 812 firm-year dataset of 203 publicly-listed Australian firms over the 2006–2009 period, our regression results show that if a firm has established an effective risk management system and internal controls, engages a big-4 auditor, its external auditor’s services involve proportionally fewer non-audit services than audit services and the more independent is its internal audit committee, it is less likely to be tax aggressive. Our additional regression results also indicate that the interaction effect between board of director composition (i.e., a higher ratio of independent directors on the board) and the establishment of an effective risk management system and internal controls jointly reduce tax aggressiveness.     

Corporate Governance,Tax Avoidance,and Financial Constraints

We examine how corporate governance affects the relationship between corporate tax avoidance and financial constraints. Conditional on having poor governance, tax avoidance is associated with greater financial constraints and a greater likelihood of financial distress. In firms with strong governance, however, we find that tax avoidance does not have a negative impact on financial constraints. Our results suggest that tax avoidance is a less useful source of financing for constrained firms when they are plagued with potential agency problems and opaque information environments. Stronger governance mechanisms can help firms mitigate the negative consequences of tax avoidance.     

Clawback provision adoption,corporate governance,and investment decisions

We examine the effect of corporate governance on the likelihood of clawback provision adoption, and its consequences in terms of corporate investment practices and risk‐taking behavior. We find that firms with strong governance (as proxied by board independence, diligence, and size) are positively associated with the firm's adoption of a clawback provision; whereas firms with weak governance (as proxied by management entrenchment, i.e., CEO duality status and tenure) are negatively associated with clawback provision adoption. Using the propensity‐score matching, difference‐in‐differences research design, and inverse Mills ratio to mitigate omitted variables and self‐selection biases, we find that after adopting a clawback provision, firms’ abnormal investment decreases and the firms’ investments are less risky.     

Executive compensation and corporate governance in China

We investigate executive compensation and corporate governance in China's publicly traded firms. We also compare executive pay in China to the USA. Consistent with agency theory, we find that executive compensation is positively correlated to firm performance. The study shows that executive pay and CEO incentives are lower in State controlled firms and firms with concentrated ownership structures. Boardroom governance is important. We find that firms with more independent directors on the board have a higher pay-for-performance link. Non-State (private) controlled firms and firms with more independent directors on the board are more likely to replace the CEO for poor performance. Finally, we document that US executive pay (salary and bonus) is about seventeen times higher than in China. Significant differences in US-China pay persist even after controlling for economic and governance factors.     

CEO hometown ties and tax avoidance‐evidence from China's listed firms

This study investigates the effects of CEO hometown ties on corporate tax avoidance. The results show that CEO hometown ties to local government officials have a significantly positive impact on tax avoidance for private firms in China. We also find that the hometown ties effect is more pronounced in cities with weak public governance and in cities whose municipal Party committee secretaries are promoted from the same city, whereas the effect is weak in cities whose municipal Party committee secretaries are transferred from other places. In summary, our results suggest that hometown ties as an important political resource can facilitate connected private firms to obtain more economic resources from government.     

Audit committee financial expertise,corporate governance,and the voluntary switch from auditor-provided to non-auditor-provided tax services

A prime objective of the SOX is to safeguard auditor independence. We investigate the relation between audit committee quality, corporate governance, and audit committees' decision to switch from permissible auditor-provided tax services. We find that firms with more independent boards, audit committees with greater accounting financial expertise, higher stock ownership by directors and institutions, that separate the CEO and Chairman of the board positions, and with higher tax to audit fee ratios are more likely to switch to a non-auditor provider. Further, we document that firms are more likely to switch prior to issuing equity. We find no evidence that broad financial expertise on audit committees is related to the switch decision, suggesting that the SEC's initial narrow definition of expertise is more consistent with the objective of the SOX. Overall, our results suggest that accounting financial expertise and strong corporate governance contribute to enhanced audit committee monitoring of auditor independence.     

Does corporate tax avoidance promote managerial empire building?

We examine the association between corporate tax avoidance and empire building using 35,060 firm-year observations from the United States (US) for the period 1991–2015. We build a composite empire building measure by conducting a factor analysis on four popular empire building proxies used in the literature. We find a positive association between this composite measure and the four proxies used to represent the tax avoidance of firms in our sample. As our results suggest, agency problems are inflicted upon firms employing tax avoidance strategies which, in turn, facilitate managerial rent extraction through aggressiveness in growth and the accumulation of assets. Furthermore, the relationship of corporate tax avoidance to managerial empire building is found to be more pronounced in firms with weak governance, poor monitoring mechanisms, greater Chief Executive Officer (CEO) power and weak corporate social responsibility (CSR) performance. We also find that empire building-motivated tax avoidance leads to lower firm valuation. Our results remain insensitive even when employing several robustness tests.     

Equity Risk Incentives and Corporate Tax Aggressiveness

This study examines equity risk incentives as one determinant of corporate tax aggressiveness. Prior research finds that equity risk incentives motivate managers to make risky investment and financing decisions, since risky activities increase stock return volatility and the value of stock option portfolios. Aggressive tax strategies involve significant uncertainty and can impose costs on both firms and managers. As a result, managers must be incentivized to engage in risky tax avoidance that is expected to generate net benefits for the firm and its shareholders. We predict that equity risk incentives motivate managers to undertake risky tax strategies. Consistent with this prediction, we find that larger equity risk incentives are associated with greater tax risk and the magnitude of this effect is economically significant. Our results are robust across four measures of tax risk, but do not vary across several proxies for strength of corporate governance. We conclude that equity risk incentives are a significant determinant of corporate tax aggressiveness.     

Large Shareholders,the Board of Directors and the Allocation of Cash Proceeds from Corporate Asset Sell‐offs

Recent finance literature suggests that managers of divesting firms may retain cash proceeds from corporate asset sell‐offs in order to pursue their own objectives, and, therefore, shareholders' gains due to these deals are linked to a distribution of proceeds to shareholders or to debtholders. We add to this literature by examining the role of various corporate governance mechanisms in the context of the allocation of sell‐off proceeds. Specifically, we examine the impact of directors' share‐ownership and stock options, board composition and external large shareholdings on (1) shareholders' abnormal returns around asset sell‐off announcements, and (2) managers' decision to either retain or distribute (to shareholders or to debtholders) sell‐off proceeds. We find that non‐executive directors' and CEO's share‐ownership and stock options are related to shareholders' gains from sell‐offs for firms that retain proceeds. However, corporate governance mechanisms are not significantly related to shareholders' gains for firms that distribute sell‐off proceeds. Furthermore, we find that the likelihood of a distribution of proceeds, relative to the retention decision, is increasing in large institutional shareholdings, executive and non‐executive directors' share‐ownership and non‐executive representation in the board.     

Taxes and Financial Constraints: Evidence from Linguistic Cues

Using a new measure of financial constraints based on firms’ qualitative disclosures, we find that financially constrained firms—firms that use more negative words in their annual reports—pursue more aggressive tax planning strategies as evidenced by: (1) higher current and future unrecognized tax benefits, (2) lower short‐ and long‐run current and future effective tax rates, (3) increase in tax haven usage for their material operations, and (4) higher proposed audit adjustments from the Internal Revenue Service. We exploit the unexpected closures of local banks as exogenous liquidity shocks to show that firms’ external financial constraints affect their tax avoidance strategies. Overall, the linguistic cues in firms’ qualitative disclosures provide incremental information beyond traditional accounting variables or commonly used effective tax rates to reveal and predict tax aggressiveness, both contemporaneously and in the future.     

Corporate social responsibility and tax aggressiveness: An empirical analysis

This study examines the association between corporate social responsibility (CSR) and corporate tax aggressiveness. Based on a sample of 408 publicly listed Australian corporations for the 2008/2009 financial year, our regression results show that the higher the level of CSR disclosure of a corporation, the lower is the level of corporate tax aggressiveness. We find a negative and statistically significant association between CSR disclosure and tax aggressiveness which holds across a number of different regression model specifications, thus more socially responsible corporations are likely to be less tax aggressive in nature. Finally, the regression results from our additional analysis indicate that the social investment commitment and corporate and CSR strategy (including the ethics and business conduct) of a corporation are important elements of CSR activities that have a negative impact on tax aggressiveness.