Corporate Tax Avoidance and CSR Investments: A Tale of Internal Resource Allocation vs. Tax Savings Incentives

• In Event: Pushing the Envelope: Corporate Tax Aggressiveness and Policy

Abstract

This paper investigates how corporate tax avoidance influences tactical and strategic CSR investments. We distinguish between two economic forces that drive the relation between tax avoidance and CSR investments: internal resource allocation and tax savings incentives. We find a positive relation between cash ETR and tactical CSR investments (i.e., charitable contributions), supporting the tax incentives explanation. In contrast, we find a negative relation between cash ETR and strategic CSR investments (e.g., climate transition initiatives), consistent with the internal resource allocation explanation. Furthermore, we find that a firm’s proportion of strategic CSR investments tends to decline as its tax rate increases. We also perform additional analyses focusing on environmentally sensitive industries, controversial industries, CSR scores, the Tax Cuts and Jobs Acts (TCJA), multinational firms, and financial distress. Overall, the results reveal that the impact of tax avoidance on firms’ CSR investments varies across different types of CSR activities.

Author

• W. Katherine Yan, wyan@csusm.edu