Can Paying Taxes Substitute for Corporate Social Responsibility? Evidence from Socially Responsible Investment Funds
51 Pages Posted: 5 Oct 2017 Last revised: 2 Apr 2018
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Can Paying Taxes Substitute for Corporate Social Responsibility? Evidence from Socially Responsible Investment Funds
Can Paying Taxes Substitute for Corporate Social Responsibility? Evidence from Socially Responsible Investment Funds
Date Written: March 28, 2018
Abstract
We examine whether corporate tax avoidance impacts the investment decisions of socially responsible investment (SRI) mutual funds. After controlling for corporate social responsibility (CSR) constructs, we find that investment by SRI funds is positively associated with paying corporate taxes. Whereas corporate tax avoidance does not affect SRI fund investment in firms with a strong CSR reputation, greater tax avoidance leads to significantly less SRI fund investment in firms as their CSR reputation weakens. These results hold after accounting for selection bias, controlling for earnings management and managerial entrenchment, and performing several robustness checks. Our findings suggest that socially responsible investors consider corporate tax avoidance an important aspect of CSR and they are consistent with recent findings in the literature that corporate insiders view paying taxes and CSR as substitutes.
Keywords: Tax Avoidance, Corporate Social Responsibility, Socially Responsible Funds, Mutual Funds
JEL Classification: G11, G23, H26
Suggested Citation: Suggested Citation