The Effect of Tax Expense Management and CSR Ratings on Investor Perceptions of Firm Value

• In Event: Tax Reporting

Abstract

Recent literature finds that investors positively value tax management activities that reduce taxes paid. Yet recent press suggests a negative backlash against companies that do not pay their “fair share.” Little empirical evidence exists regarding investor perceptions of tax management. We posit that corporate tax activities are related to corporate social responsibility (CSR) and may be a component of CSR. We predict the interaction of tax management and CSR performance influences investor pricing behavior.

We find, in the absence of any CSR information or when a firm has poor CSR performance, investors perceive paying more taxes as socially responsible. However, when CSR performance is high, tax management does not influence perceptions about CSR. Also, although investors may perceive firms that pay more taxes as more socially responsible, they do not differentially price firms for taxes paid (or tax management) when CSR performance is low. When CSR performance is high, investors reward firms that effectively manage taxes – not firms that pay more. We only find a price premium for firms that have both good CSR ratings and effectively manage their taxes. Our results are consistent with an interactive effect of CSR performance and tax management on firm value.
 

Authors

• Ann Boyd Davis, Tennessee Tech University

• Rebekah D. Moore, Northeastern University

• Timothy J Rupert, Northeastern University