Labor protection and corporate tax avoidance

: a cross-country analysis

Abstract

In my thesis, I examine the impact of two components of labor protection laws – employment contract laws and collective relations laws – on corporate tax avoidance behavior in an international setting. Prior studies have shown considerable cross-sectional variance in tax avoidance, and most of these studies focus on the impact of the firm’s financial stakeholders (e.g., shareholders, board directors, managers, creditors), but the impact of non-financial stakeholders on corporate tax avoidance has received far less attention. To fill this void, by focusing on the impact of an important non-financial stakeholder – labor, and by examining labor’s influence on corporate tax avoidance decision in an international setting, my study provides evidence that the firms’ non-financial stakeholders play a crucial role in explaining the cross-sectional variance in corporate tax avoidance. First, by using the index of employment contract laws constructed by Botero et al. (2004) as proxy for the influence of employment contract laws, I find that corporate tax avoidance is higher for firms in countries with stronger employment contract laws. I further investigate whether labor intensity (Hypothesis 1a) and financial constrains (Hypothesis 1b) have differential effect on the relation between tax avoidance and employment contract laws. I find that the relation between tax avoidance and employment contract laws is more pronounced in labor intensive industries. Furthermore, the relation is also more pronounced in firms with financial constraints. Second, by using collective relations laws index also constructed by Botero et al. (2004) as proxy for the influence and power of labor unions at the country-level, I find that corporate tax avoidance is lower for firms in countries with stronger collective relations laws. To provide deeper insight for hypothesis 2, I investigate how shareholder protection laws and collective relations laws interact in affecting firms’ tax avoidance decision. To test this hypothesis, I conduct subsample analyses and find that in countries with stronger shareholder protection, the relation between collective relations laws and tax avoidance becomes stronger, supporting the conjecture that labor protection and investor protection closely intertwined in determining how firms respond – as in their tax avoidance decisions.

Date of Award	16 Feb 2015
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Bin SRINIDHI (Supervisor) & Cheong Heon YI (Supervisor)