Abstract
Based on a risk management perspective on corporate social responsibility (CSR), this study examines whether firms engaging in tax avoidance can benefit from CSR. We posit that CSR engagement can provide insurance-like protection for firm value by reducing the reputation risk of tax avoidance. Moreover, the extent to which CSR functions as insurance is largely dependent on a firm’s communication strategy. In this study, a fixed-effect panel regression model is applied to examine the moderating effect of CSR engagement and greenwashing on the relationship between tax avoidance and firm value for listed Chinese firms. We find that a greenwashing strategy, i.e., a CSR communication strategy with aggressive symbolic actions and little to no substantive actions, generates negative capital and leads to a negative impact of tax avoidance on firm value. The findings are robust when considering deferred tax expenses and conducting a subgroup analysis. These findings advance our understanding of the relationship between tax avoidance, CSR and financial performance. They also help corporate executives select an effective CSR strategy for risk management purposes.
Highlights
Tax research has shown that firms adopt various strategies to engage in tax avoidance, which appears to be highly effective in reducing costs and increasing investors’ wealth [1]
The results of this study suggest that the effect of tax avoidance on firm value varies depending on a firm’s corporate social responsibility (CSR) engagement and CSR communication strategy
We suggest that moral legitimacy is essential for CSR to produce an insurance mechanism, and a non-greenwashing strategy is more likely to gain moral legitimacy than a greenwashing strategy
Summary
Tax research has shown that firms adopt various strategies to engage in tax avoidance, which appears to be highly effective in reducing costs and increasing investors’ wealth [1]. Tax avoidance increases risk, and leads to a negative evaluation by investors and a decrease in the firm value. In this way, tax avoidance can pose a significant risk to corporate reputation. CSR has been referred to as a firm’s voluntary contribution to the development of a better society though various activities, such as philanthropy, environmental and/or charity projects, and the improvement of social welfare, beyond business operations [7,12] In this vein, managers believe that CSR engagement can generate positive moral capital, which “can help temper stakeholders’ negative judgments and their sanctions when adverse developments materialize” [13]. Positive value of CSR against the risks caused by tax avoidance is usually referred to as “insurance-like protection” [14], which in turn makes the firm attractive to investors [15]
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