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Journal of Business Ethics

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18.12.2017 | Original Paper

Local Social Environment, Firm Tax Policy, and Firm Characteristics

verfasst von: Ziqi Gao, Louise Yi Lu, Yangxin Yu

Erschienen in: Journal of Business Ethics | Ausgabe 2/2019

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Abstract

This study examines the conditions under which local social environments are likely to influence corporate tax behavior. Using a social capital index at the county level, we find that on average, social capital reduces firms’ aggressive tax avoidance behavior. The impact of social capital on corporate tax avoidance is weaker when managers are under excessive pressure to meet earnings targets, during the periods of financial constraints, and when managers are incentivized to undertake risk. We further find that corporate tax avoidance activities engaged by firms headquartered in high-social-capital counties tend to be less value-increasing, indicating that potential social sanctions in these areas may reduce the benefits of tax avoidance activities accrue to firms. However, the negative impact of tax avoidance on firm value in high-social-capital counties tends to be lower for firms with strong corporate governance, which suggests that managers in well-governed firms can better exploit tax avoidance opportunities. Overall, our evidence is consistent with our conjecture that although the local social environments have a significant influence on corporate tax behavior, this influence is fragile in the presence of excessive earnings pressure, financial constraints, and equity risk incentives.

Vorheriger Artikel Managerial Efficiency, Corporate Social Performance, and Corporate Financial Performance

Nächster Artikel Corporate Social Responsibility and Corporate Disclosures: An Investigation of Investors’ and Analysts’ Perceptions

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Hasan et al. (2017) suggest that “tax-minded” managers tend to view corporate taxes are unfair and inefficient. However, they do not specifically examine what kind of managers are more likely to be “tax-minded.”.

Corporate tax avoidance is not necessarily illegal, for tax laws permit certain tax planning activities (Dyreng et al. 2008). Moreover, all tax systems have loopholes and inconsistencies (Weisbach 2002b), and the tax authorities do not have sufficient resources to audit all transactions (Fox et al. 2014).

We thank the reviewer for bringing this point to our attention.

As discussed in the Empirical results section, in the PSM analysis, we match firms headquartered in high-social-capital counties to firms headquartered low-social-capital counties. In the IV analysis, following Hilary and Huang (2015), we use US county-level violent crime rate and state-level gun ownership as the instruments for social capital.

Our results also hold if we control for firms’ geographical complexity, and county fixed effects.

The costs associated with failing to meet important earnings benchmarks include: severe negative stock market reactions, losing credibility with the capital markets, and hurting managers’ career prospects (Graham et al. 2005).

NRCRD only provides social capital data for the year 1990, 1997, 2005, and 2009. As a robustness check, we extrapolate the social capital data to year 2012. Although we believe this extrapolation makes the social capital measure less accurate, our untabulated results show that the coefficients of social capital are still negative and significant when using the sample period 1990–2012.

All the data required to construct the index can be found at the NERCRD.

We use such a small caliper because important covariate such as firm size can only be balanced when using a very small caliper.

We follow Armstrong et al. (2010) to examine the covariate balance between high-social-capital and low-social-capital observations. Untabulated results show that for all the firm-level covariates, the differences between the treatment (high social capital) and control (low social capital) groups are not significant. Although the differences between treatment and control groups are significant for four demographic variables (EDU, SEX, MINORITY, and POP), the largest absolute percentage bias is only 5.4, indicating the demographic variables are generally well balanced.

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Titel: Local Social Environment, Firm Tax Policy, and Firm Characteristics
verfasst von: Ziqi Gao
Louise Yi Lu
Yangxin Yu
Publikationsdatum: 18.12.2017
Verlag: Springer Netherlands
Erschienen in: Journal of Business Ethics / Ausgabe 2/2019
Print ISSN: 0167-4544
Elektronische ISSN: 1573-0697
DOI: https://doi.org/10.1007/s10551-017-3765-2

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