Study on Corporate Social Responsibility (CSR): Focus on Tax Avoidance and Financial Ratio Analysis

Abstract

This study is an attempt to find a causal relation between financial ratios and tax avoidance. Aside from direct financial responsibilities, we conjecture that firms that avoid taxes will also face indirect negative financial repercussions, such as degradation of their reputation in the investment market. Corporate Social Responsibility (CSR: Corporate Social Responsibility) activities are reflected in the market as firms make a commitment to society, and investors perceive a positive value in an investment in such firms. Between the two contradictory drivers, tax avoidance and CSR activities, we seek to find their interplaying relation with financial ratios. From this study, tax authorities can regulate firms that engage in tax avoidance and encourage firms to conduct CSR activities. We summarize our findings as below: First, CSR activities deter tax avoidance, specifically in firms that are actively engaged in CSR. On the other hand, passive involvement in CSR does not have any influence on tax avoidance. Secondly, we find that current asset turnover, the labor-to-equipment ratio, the noncurrent liabilities ratio, and the net income-to-equity ratio all have a positive and significant influence on corporate tax avoidance. Conversely, common equity growth has been shown to be negatively related with corporate tax avoidance. From this empirical study, we contribute to the studies on tax avoidance by showing that there can be a voluntary method to reduce corporate tax avoidance in firms, which is by encouraging them to engage in CSR activities.