Corporate Social Responsibility Engagement, Tax Aggressiveness, and Firm Value

• In Event: Public Interest/Taxation/International Accounting

Abstract

This paper examines the relation among corporate social responsibility engagement (CSR), aggressive tax reporting practices and firm value. We find that while investors generally value CSR involvement positively, the value premium placed on CSR activities is smaller when firms have more aggressive tax reporting practices. We interpret this as consistent with the argument that investors can differentiate CSR activities that appear to be socially responsible commitment from those that are likely to be used opportunistically in an attempt to offset negative corporate reputation created by socially irresponsible behaviors such as aggressive tax reporting. Moreover, to understand the source of the discount of CSR engagement for tax aggressive firms, we investigate two situations where CSR is more likely to be perceived as an effort driven by a need to boost corporate image rather than a true commitment to be socially responsible. For example, tax aggressive firms with weak corporate governance may have a greater demand to invest more in CSR to build better corporate reputation. Similarly, greater CSR engagement may result from a firm’s greater need to offset a negative corporate image created by aggressive tax reporting. As predicted, our evidence indicates that the reduction in valuation effect of CSR engagement associated with tax aggressiveness is primarily found in firms that are poorly governed or have high CSR engagement. Overall, our results suggest that investors reward CSR efforts of firms the most when their other practices are aligned with socially responsible behaviors.

Authors

• Joohyung Ha, Loyola University New Orleans

• Mingming Feng, Western Michigan University