Exploring the Impact of Firm‐level Legality on Tax Avoidance

Abstract

Although the topic of legality is receiving increasing interest in academic and policy debates, examining its economic effects at the firm level remains a relatively underexplored line of research. This study offers further advances to the existing literature by performing an examination of the relationship between corporate legality and tax avoidance. Based on a unique dataset of 1,168 private Italian companies and by exploiting a novel measure of corporate legality developed by the Italian Competition Authority, we provide evidence that firm‐level legality is positively associated with effective tax rates ..(i.e., lower tax avoidance practices). These findings are robust to a battery of additional tests and are informative for local policymakers and international investors since they suggest that legality is an important factor to which attention should be paid in scrutinizing corporate tax strategies.