Abstract
The literature provides various theories relating to the relationship between corporate social responsibility (CSR) and tax avoidance. If firms view both CSR activities and tax payments as paths toward contributing to society, CSR and tax avoidance activities exhibit a negative relationship. Conversely, the two activities exhibit a positive relationship if firms engage in CSR for the purpose of risk management. This study examines the effect of CSR on corporate tax avoidance using a matching approach. Three matching algorithms, namely nearest neighbor, radius, and kernel algorithms, are used to match the two groups of firms (CSR and non-CSR firms) in order to correct for sample selection bias. This study adopts Chinese listed firms during 2009–2016 as a research sample. Most empirical results show that CSR firms have higher book-tax differences and lower effective tax rates. This indicates that CSR firms are more aggressive in their tax avoidance. These findings imply that firms engage in CSR activities as a risk management strategy.
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Notes
According to corporate culture theories, if the corporate culture recognizes that a corporate should not view shareholder wealth maximization as its only goal, but should assume the responsibility of increasing social welfare and making contributions to the society, the corporate is likely to implement CSR (Carroll 1979; Garriga and Mele 2004; Mackey et al. 2007).
If we simply compare firms that engaged in CSR with those that did not, this may produce selection bias. The selection bias can be shown as the following equation:
\(E(t_{1i} |c_{i} = 1) - E(t_{0i} |c_{i} = 0)\) \(= E(t_{1i} - t_{0i} |c_{i} = 1) + E(t_{0i} |c_{i} = 1) - E(t_{0i} |c_{i} = 0).\)
The observed difference in tax avoidance between the two groups can be represented by the sum of the ATT and selection bias.
This study applies nearest neighbor matching with replacement, meaning that comparison unit can be used more than once as a match. Matching with replacement helps to reduce bias (Dehejia and Wahba 2002).
This study uses a quarter of a standard deviation of the sample estimated propensity as a tolerance level, which is suggested by Rosenbaum and Rubin (1983).
This study chooses 0.05 as the bandwidth value for the kernel matching. Low bandwidth values yield an unbiased estimate of the true density function.
Such a development index refers to a group of CSR indices such as International Organization for Standardization 26,000, Global Reporting Initiative, Dow Jones Sustainability Index, Wealth Magazine CSR index, and Financial Times Stock Exchange 4 Good Index.
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Mao, CW. Effect of corporate social responsibility on corporate tax avoidance: evidence from a matching approach. Qual Quant 53, 49–67 (2019). https://doi.org/10.1007/s11135-018-0722-9
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DOI: https://doi.org/10.1007/s11135-018-0722-9