Smoke and mirrors: Corporate social responsibility and tax avoidance

The bourgeoning corporate social responsibility literature has paid little attention to organised tax avoidance by companies even though it has real consequences for the life chances of millions of people. Companies legitimise their social credentials by making promises of responsible and ethical conduct, but organisational culture and practices have not necessarily been aligned with publicly espoused claims. This paper draws attention to the gaps between corporate talk, decisions and action, or what may be characterised as organised hypocrisy. Its persistence can become a liability and threaten the welfare of the company, its employees and its executives. The paper provides examples to show how companies, including major accountancy firms, make promises of responsible conduct, but indulge in tax avoidance and evasion. It also shows that the exposure of contradictions between talk and action has yielded negative outcomes.     

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 social responsibility and social capital

When corporations make an effort to be socially responsible beyond what is required by the law, this effort is often described as strategic—made mainly for the shareholders’ or managers’ benefit. A large body of literature corroborates this belief. But, could the incentives for corporate social responsibility (CSR) come from an altruistic inclination fostered by the social capital of the region in which the firm is headquartered? We investigate whether this phenomenon exists by examining the association between the social capital in the region and the firm’s CSR. We find that a firm from a high social capital region exhibits higher CSR. This result suggests that the self-interest of shareholders or mangers does not explain all of the firm’s CSR, but the altruistic inclination from the region might also play a role.     

Corporate social responsibility reports: topic analysis and big data approach

ABSTRACT

This paper performs topic modeling using all publicly available CSR (Corporate Social Responsibility) reports for all constituent firms of the major stock market indices of 15 industrialized countries included in MSCI Europe for the sample period from 1999 to 2016. Our text mining results and LDA analyses indicate that ‘employees safety’, ‘employees training support’, ‘carbon emission’, ‘human right’, ‘efficient power’, and ‘healthcare medicines’ are the common topics reported by publicly listed companies in Europe and the UK. There is a clear sector bias with industrial firms emphasizing ‘employee safety’, Utilities concentrating on ‘efficient power’ while consumer discretionary and consumer staples highlighting ‘food waste’ and ‘food packaging.’ To produce these results, we used a battery of python code to organize the hundreds of reports downloaded from Bloomberg and the internet, the latest R-algorithm to estimate LDA (Latent Dirichlet Allocation) model and the LDAvis interactive tool to visualize and refine the LDA model.     

Corporate social responsibility and trade credit

Review of Quantitative Finance and Accounting - Prior studies show that higher corporate social responsibility (CSR) performance lowers firms’ cost of debt and equity financing. Using a...     

Corporate social responsibility and stock split

This study examines whether socially responsible companies are likely to conduct a stock split. We argue that these companies, compared to their counterparts, could use their strong corporate social responsibility (CSR) performance to reduce information asymmetry with shareholders, and therefore, are less likely to rely on stock splits to signal their future growth potentials. We find empirical evidence to support our hypothesis and investigate the reasons for the lower frequency of stock splits among CSR oriented firms. We find that more socially responsible firms experience a smaller increase in trading volume and a greater increase in bid-ask spread following a stock split than less socially responsible firms. Furthermore, our study finds that, when more socially responsible firms decide to conduct a stock split, they attract a greater proportion of institutional investors with long-term investment horizons.

     

Corporate social responsibility and dividend policy

This study outlines and tests two corporate social responsibility (CSR) views of dividends. The first view argues that firms are likely to pay fewer dividends because CSR activities lower the cost of equity, encouraging firms to invest or hoard cash rather than to pay dividends. The second view suggests that CSR activities are positive NPV projects that increases earnings and hence dividend payouts. The first (second) view predicts that firms with a stronger involvement in CSR activities should be associated with a lower (higher) dividend payouts. The finding supports the second view and is robust.     

Corporate social responsibility and earnings forecasting unbiasedness

We investigate the relationship between corporate social responsibility (CSR) and I/B/E/S analysts’ earnings per share (EPS) forecasts using a large sample of US firms for 1992–2011. Based on literature findings, we decompose the CSR effect into four factors: accounting opacity, corporate governance, stakeholder risk, and overinvestment. We find that all of them significantly affect both the absolute forecast error on EPS and its standard deviation controlling for forecast horizon; number of analysts and forecasts; and year, industry, and broker house effects. Consistently with our ex ante hypotheses, overinvestment, stakeholder risk, and accounting opacity have a positive effect, increasing both dependent variables, while corporate governance quality has a negative effect. A crucial aspect of our findings is that high CSR quality in terms of the four factors (i.e., accounting transparency, high corporate governance quality, stakeholder risk mitigation, and absence of overinvestment) contributes to making earnings forecasts unbiased as unbiasedness is generally met in the subsample of the Top CSR quality companies and markedly violated in the subsample of the Bottom CSR companies. We also document that overinvestment and stakeholder risk are sufficient to produce this effect.     

Corporate social responsibility performance and information asymmetry

Using Corporate Social Responsibility (CSR) performance scores from KLD STAT, we investigate whether CSR performance affects information asymmetry. We find that both positive and negative CSR performance reduce information asymmetry. Moreover, we find that the influence of negative CSR performance is much stronger than that of positive CSR performance in reducing information asymmetry. We also investigate the effect of informed investors on the CSR performance-asymmetry relation. We find that the negative association between CSR performance and bid-ask spread decreases for firms with a high level of institutional investors compared to those with a low level of institutional investors. This finding suggests that informed investors may exploit their CSR information advantage. Overall, our results suggest that CSR performance plays a positive role for investors by reducing information asymmetry and that regulatory action may be appropriate to mitigate the adverse selection problem faced by less-informed investors.     

Tax avoidance,tax management and corporate social responsibility

This study examines the effect of three measures of corporate social responsibility (CSR) — corporate governance, community and diversity on tax avoidance in firms that use auditor‐provided tax services. This is one of the first studies, to our knowledge, to empirically relate tax avoidance, tax management and CSR literature. By separating the strengths and concerns for each CSR measure, we are able to analyze the effects of a firm's negative and positive social actions on tax avoidance. We find that the interaction of community concerns with tax management fees positively affects both GAAP and Cash ETR, while the interaction of corporate governance strengths and diversity concerns with tax management fees negatively affects Cash ETR. Our results are similar when we use Excess ETR that is not explained by firm specifics. We find additional evidence that CSR affects tax avoidance when we divide firms into portfolios based on CSR levels. Our findings suggest that future studies on tax avoidance and tax management should incorporate CSR.     

Corporate social responsibility and corruption risk: A global perspective

This paper extends our knowledge on corporate corruption risk by examining whether and to what extent corporate social responsibility (CSR) affects firm-level corruption risk. Using a cross-country sample of major multinational firms, we find that firm-level CSR mitigates corruption risk. On closer examination, we find that the relationship between CSR and corruption risk is mediated by country-level variables such as institutional quality, protection of minority shareholders’ rights, stock market development and freedom of the press. Further, we find that in emerging countries, CSR mitigates corruption risk only when the country-level institutional quality is high and citizens enjoy press freedom. Our findings suggest that both formal institutions and the quality of civil society influence the effect of CSR on corruption risk. Our results remain robust to controls for endogeneity and potential sample selection bias.     

Corporate social responsibility and provision of trade credit

In this article, we identify and examine three different views of corporate social responsibility (CSR) and the relationship between CSR and firms’ provision of trade credit. The trust view of CSR argues that CSR and trade credit provision are related positively, because CSR, as a trust-enhancing device, complements the incomplete contract nature of trade credit. The CSR literature shows that CSR firms tend to have higher cash holdings. With this in mind, the precautionary motive view of CSR suggests that cash holdings serve as a hedge against trade credit risk, while, on the other hand, the substitution view of CSR predicts that cash hoarding discourages the provision of trade credit. Using a dataset of 20,591 firm-year observations from 1991 to 2015, we find strong evidence that supports both the trust and substitution views of CSR but not the precautionary view of CSR.     

Labor unions and tax aggressiveness

We examine the impact of unionization on firms' tax aggressiveness. We find a negative association between firms' tax aggressiveness and union power and a decrease in tax aggressiveness after labor union election wins. This relation is consistent with labor unions influencing managers' in one, or both, of two ways: (1) constraining managers' ability to invest in tax aggressiveness through increased monitoring; or (2) decreasing returns to tax aggressiveness that arise from unions' rent seeking behavior. We also find preliminary evidence that the market expects these reductions around union elections and discounts firms that likely add shareholder value via aggressive tax strategies.     

Corporate social responsibility and stakeholder value maximization: Evidence from mergers

Using a large sample of mergers in the US, we examine whether corporate social responsibility (CSR) creates value for acquiring firms' shareholders. We find that compared with low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers' social performance is an important determinant of merger performance and the probability of its completion, and they support the stakeholder value maximization view of stakeholder theory.     

Another look at corporate social responsibility and reporting: An empirical study in a developing country

This paper presents a view of corporate social responsibility accounting and reporting from the standpoint of a developing country. The study is based on a personal interview questionnaire survey conducted by the authors with mainly chief executive officers in one hundred companies operating in Malaysia. Various aspects of corporate social performance, including social reporting, are examined. The findings indicate that social reporting lags behind corporate social involvement and that major corporate attention is focused on activities relating to employees and products/services. In addition, the results show that corporate size and national origin of corporate ownership are relevant in reflecting the extent of social commitments made by companies.     

Corporate social responsibility assurance and reporting quality: Evidence from restatements

Previous research has shown that obtaining independent assurance of corporate social responsibility (CSR) reporting has capital market benefits and that these benefits are amplified when accountants provide the assurance. Yet, little is known about whether and the manner in which CSR assurance improves the quality of CSR reporting, and whether accounting providers improve reporting quality to a greater extent than non-accounting providers. This study uses the unique setting of CSR restatements to examine these issues. We present theoretical and empirical evidence supporting a competitive advantage of using accounting firms as assurance providers as they not only identify inaccuracies in previous reports earlier than non-accounting providers, but also prevent future reporting inaccuracies. CSR assurance, from either type of provider, also leads to improved reporting definitions, scopes, and methodologies that require restatements for comparability. Results also indicate that CSR reporting frameworks (e.g., GRI) are not a substitute for obtaining CSR assurance as the latter has incremental benefits over GRI usage in terms of identifying errors and reporting improvements. These results have implications for public policy makers considering the merits of mandating CSR assurance and for organizations assessing the relative benefits and costs of preparing GRI-based CSR reports, obtaining CSR assurance, and choosing between accounting vs. non-accounting CSR assurance providers.     

Corporate social responsibility and degrees of operating and financial leverage

We examine the relationship between corporate social responsibility (CSR) and firms’ degrees of operating (DOL) and financial leverage (DFL). Combining the enlightened value maximizing and capital structure theories, we hypothesize that CSR as firms’ strategic choice to internalize the cost from implicit contracts between the firms and their non-investing stakeholders affects firms’ operating and financial leverage. We find empirical evidence that CSR and CSR strengths are positively (negatively) related to firms’ DOL (DFL). CSR concerns are positively related firms’ DOL and DFL. We also document that CSR is positively related to firms’ operating cost and we find evidence that CSR acts as a substitute for corporate debt tax shield when firms’ financial leverage is low.     

Corporate social responsibility in the banking industry: Motives and financial performance

The current study investigates the association between corporate social responsibility (CSR) and financial performance (FP), and discusses the driving motives of banks to engage in CSR. Three motives, namely, strategic choices, altruism, and greenwashing, suggest that the relationship between CSR and FP is positive, non-negative, and non-existent, respectively. We obtained our sample, which covered 2003–2009, from the Ethical Investment Research Service (EIRIS) databank and Bankscope database. The data consists of 162 banks in 22 countries. We then classified the banks into four types based on their degree of engagement in CSR. This study proposes the use of an extended version of the Heckman two-step regression, in which the first step adopts a multinomial logit model, and the second step estimates the performance equation with the inverse Mills ratio generated by the first step. The empirical results show that CSR positively associates with FP in terms of return on assets, return on equity, net interest income, and non-interest income. In contrast, CSR negatively associates with non-performing loans. Hence, strategic choice is the primary motive of banks to engage in CSR.     

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.     

Corporate tax avoidance and stock price crash risk: Firm-level analysis

Using a large sample of U.S. firms for the period 1995–2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.