Does Tax Avoidance Increase or Decrease When Tax Enforcement is Stronger?: Evidence using CSR Heterogeneity Perspective

Gilad Livne; Ilanit Gavious; Ester Chen

doi:10.1016/j.irfa.2022.102325

Does Tax Avoidance Increase or Decrease When Tax Enforcement is Stronger? Evidence using CSR Heterogeneity Perspective

Gilad Livne
, Ilanit Gavious^*
, Ester Chen

^*Corresponding author for this work

Research output: Contribution to journal › Article (Academic Journal) › peer-review

21 Citations (Scopus)

86 Downloads (Pure)

Abstract

Prior literature has reported mixed results on whether corporate social responsibility (CSR) activities are associated with more or less tax avoidance. These past results may be attributed to a failure to control for endogeneity between tax avoidance and CSR. We utilize an exogenous increase in tax enforcement to investigate how a heightened level of scrutiny by authorities affects tax avoidance by firms adopting CSR policies (CSR firms) compared to non-CSR firms. If stronger enforcement leads to greater tax compliance, we expect to observe a decline in tax avoidance measures in all firms. As expected, tax avoidance has decreased in non-CSR firms in response to this exogenous change, but surprisingly, in CSR firms it has increased. The results are supported by theories such as the licensing effect and organized hypocrisy. We contribute to the literature by using an exogenous shock to tax enforcement to shed light on whether CSR firms act in a socially responsible manner in their tax reporting. Moreover, we provide new empirical evidence relevant to the theory of organized hypocrisy, whereby there are notable inconsistencies between the actions that corporations take to bolster their public image and self-serving practices.

Original language	English
Article number	102325
Number of pages	14
Journal	International Review of Financial Analysis
Volume	84
Early online date	31 Jul 2022
DOIs	https://doi.org/10.1016/j.irfa.2022.102325
Publication status	Published - 1 Nov 2022

Bibliographical note

Funding Information:
The authors thank Brian Lucey, the Editor, an anonymous reviewer, Eli Amir, Adnan Isin, Martin Jacob, Shai Levi, Giovanna Michelon, Orit Milo, Diane Romm, Silvina Rubio, Mao Yaping, and workshop participants at Aalto University, the University of Bristol, and Guilford Glazer Faculty of Business and Management for helpful comments. We gratefully acknowledge the financial support of the Guilford Glazer Faculty of Business and Management . All errors remain our responsibility.

Funding Information:
The authors thank Brian Lucey, the Editor, an anonymous reviewer, Eli Amir, Adnan Isin, Martin Jacob, Shai Levi, Giovanna Michelon, Orit Milo, Diane Romm, Silvina Rubio, Mao Yaping, and workshop participants at Aalto University, the University of Bristol, and Guilford Glazer Faculty of Business and Management for helpful comments. We gratefully acknowledge the financial support of the Guilford Glazer Faculty of Business and Management. All errors remain our responsibility.

Publisher Copyright:
© 2022 Elsevier Inc.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 12 Responsible Consumption and Production

Keywords

Corporate social responsibility (CSR)
organized hypocrisy
earnings management
tax avoidance
licensing effect

Access to Document

10.1016/j.irfa.2022.102325

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This is the accepted author manuscript (AAM). The final published version (version of record) is available online via Elsevier at https://doi.org/10.1016/j.irfa.2022.102325. Please refer to any applicable terms of use of the publisher.
Accepted author manuscript, 673 KBLicence: CC BY-NC-ND

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Cite this

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title = "Does Tax Avoidance Increase or Decrease When Tax Enforcement is Stronger?: Evidence using CSR Heterogeneity Perspective",

abstract = "Prior literature has reported mixed results on whether corporate social responsibility (CSR) activities are associated with more or less tax avoidance. These past results may be attributed to a failure to control for endogeneity between tax avoidance and CSR. We utilize an exogenous increase in tax enforcement to investigate how a heightened level of scrutiny by authorities affects tax avoidance by firms adopting CSR policies (CSR firms) compared to non-CSR firms. If stronger enforcement leads to greater tax compliance, we expect to observe a decline in tax avoidance measures in all firms. As expected, tax avoidance has decreased in non-CSR firms in response to this exogenous change, but surprisingly, in CSR firms it has increased. The results are supported by theories such as the licensing effect and organized hypocrisy. We contribute to the literature by using an exogenous shock to tax enforcement to shed light on whether CSR firms act in a socially responsible manner in their tax reporting. Moreover, we provide new empirical evidence relevant to the theory of organized hypocrisy, whereby there are notable inconsistencies between the actions that corporations take to bolster their public image and self-serving practices. ",

keywords = "Corporate social responsibility (CSR), organized hypocrisy, earnings management, tax avoidance, licensing effect",

author = "Gilad Livne and Ilanit Gavious and Ester Chen",

note = "Funding Information: The authors thank Brian Lucey, the Editor, an anonymous reviewer, Eli Amir, Adnan Isin, Martin Jacob, Shai Levi, Giovanna Michelon, Orit Milo, Diane Romm, Silvina Rubio, Mao Yaping, and workshop participants at Aalto University, the University of Bristol, and Guilford Glazer Faculty of Business and Management for helpful comments. We gratefully acknowledge the financial support of the Guilford Glazer Faculty of Business and Management . All errors remain our responsibility. Funding Information: The authors thank Brian Lucey, the Editor, an anonymous reviewer, Eli Amir, Adnan Isin, Martin Jacob, Shai Levi, Giovanna Michelon, Orit Milo, Diane Romm, Silvina Rubio, Mao Yaping, and workshop participants at Aalto University, the University of Bristol, and Guilford Glazer Faculty of Business and Management for helpful comments. We gratefully acknowledge the financial support of the Guilford Glazer Faculty of Business and Management. All errors remain our responsibility. Publisher Copyright: {\textcopyright} 2022 Elsevier Inc.",

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doi = "10.1016/j.irfa.2022.102325",

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T1 - Does Tax Avoidance Increase or Decrease When Tax Enforcement is Stronger?

T2 - Evidence using CSR Heterogeneity Perspective

AU - Livne, Gilad

AU - Gavious, Ilanit

AU - Chen, Ester

N1 - Funding Information: The authors thank Brian Lucey, the Editor, an anonymous reviewer, Eli Amir, Adnan Isin, Martin Jacob, Shai Levi, Giovanna Michelon, Orit Milo, Diane Romm, Silvina Rubio, Mao Yaping, and workshop participants at Aalto University, the University of Bristol, and Guilford Glazer Faculty of Business and Management for helpful comments. We gratefully acknowledge the financial support of the Guilford Glazer Faculty of Business and Management . All errors remain our responsibility. Funding Information: The authors thank Brian Lucey, the Editor, an anonymous reviewer, Eli Amir, Adnan Isin, Martin Jacob, Shai Levi, Giovanna Michelon, Orit Milo, Diane Romm, Silvina Rubio, Mao Yaping, and workshop participants at Aalto University, the University of Bristol, and Guilford Glazer Faculty of Business and Management for helpful comments. We gratefully acknowledge the financial support of the Guilford Glazer Faculty of Business and Management. All errors remain our responsibility. Publisher Copyright: © 2022 Elsevier Inc.

PY - 2022/11/1

Y1 - 2022/11/1

N2 - Prior literature has reported mixed results on whether corporate social responsibility (CSR) activities are associated with more or less tax avoidance. These past results may be attributed to a failure to control for endogeneity between tax avoidance and CSR. We utilize an exogenous increase in tax enforcement to investigate how a heightened level of scrutiny by authorities affects tax avoidance by firms adopting CSR policies (CSR firms) compared to non-CSR firms. If stronger enforcement leads to greater tax compliance, we expect to observe a decline in tax avoidance measures in all firms. As expected, tax avoidance has decreased in non-CSR firms in response to this exogenous change, but surprisingly, in CSR firms it has increased. The results are supported by theories such as the licensing effect and organized hypocrisy. We contribute to the literature by using an exogenous shock to tax enforcement to shed light on whether CSR firms act in a socially responsible manner in their tax reporting. Moreover, we provide new empirical evidence relevant to the theory of organized hypocrisy, whereby there are notable inconsistencies between the actions that corporations take to bolster their public image and self-serving practices.

AB - Prior literature has reported mixed results on whether corporate social responsibility (CSR) activities are associated with more or less tax avoidance. These past results may be attributed to a failure to control for endogeneity between tax avoidance and CSR. We utilize an exogenous increase in tax enforcement to investigate how a heightened level of scrutiny by authorities affects tax avoidance by firms adopting CSR policies (CSR firms) compared to non-CSR firms. If stronger enforcement leads to greater tax compliance, we expect to observe a decline in tax avoidance measures in all firms. As expected, tax avoidance has decreased in non-CSR firms in response to this exogenous change, but surprisingly, in CSR firms it has increased. The results are supported by theories such as the licensing effect and organized hypocrisy. We contribute to the literature by using an exogenous shock to tax enforcement to shed light on whether CSR firms act in a socially responsible manner in their tax reporting. Moreover, we provide new empirical evidence relevant to the theory of organized hypocrisy, whereby there are notable inconsistencies between the actions that corporations take to bolster their public image and self-serving practices.

KW - Corporate social responsibility (CSR)

KW - organized hypocrisy

KW - earnings management

KW - tax avoidance

KW - licensing effect

U2 - 10.1016/j.irfa.2022.102325

DO - 10.1016/j.irfa.2022.102325

M3 - Article (Academic Journal)

SN - 1057-5219

VL - 84

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

M1 - 102325

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