Local Social Environment, Firm Tax Policy, and Firm Characteristics

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

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Detail(s)

Original languageEnglish
Pages (from-to)487–506
Journal / PublicationJournal of Business Ethics
Volume158
Issue number2
Early online date18 Dec 2017
Publication statusPublished - Aug 2019

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.

Research Area(s)

  • Social environment, Tax avoidance, Unethical corporate behavior

Citation Format(s)

Local Social Environment, Firm Tax Policy, and Firm Characteristics. / Gao, Ziqi; Lu, Louise Yi; Yu, Yangxin.

In: Journal of Business Ethics, Vol. 158, No. 2, 08.2019, p. 487–506.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review