Market Valuation of Tax Avoidance and Corporate Social Responsibility: Does the Market Discount Corporate Robin Hoods?

• In Event: Revenue Recognition, Valuation, and Corporate Social Responsibility

Abstract

This study examines whether market valuation of firms’ tax avoidance is tempered by the extent firms engage in Corporate Social Responsibility (CSR) activities. Prior studies document that investors positively value tax avoidance. Given that many CSR activities are low risk, low yielding uses of firm resources, we posit that higher levels of CSR activities may signal to investors that cash generated via tax avoidance has not been fully used to generate a return sufficient to offset the risk associated with tax planning strategies. Consistent with this argument, we find that the positive association between market value and tax avoidance is significantly weakened when firms have higher levels of positive CSR activity. Further, we find philanthropic-type CSR activities in particular are associated with the discount on tax avoidance. We interpret our results as suggesting the equity market views CSR activities to be ostensibly funded through cash savings generated via tax avoidance.

Authors

• Kerry Katharine Inger, Auburn University

• Brian A Vansant, Auburn University