Abstract
This study examines the effect of labor unions on corporate tax avoidance activities. Labor union is an important stakeholder in terms of corporate governance; thus, managers may engage in certain accounting choices that reflect union members’ position to improve the relation with labor union. This paper empirically investigates whether managers engage in tax avoidance activities to secure financial resources for workers’ pay when the negotiation power of labor unions is higher. The empirical analysis is based on a sample of firms listed in the Korean stock market from 2001 to 2008. The authors find that companies, where labor unions are organized, have a significantly higher level of tax avoidance activities. Also, the authors attempt to examine the effect of labor unions’ bargaining power on tax avoidance. While the union membership ratio is not significantly related to tax avoidance, labor unions that belong to upper-level labor organizations significantly affect the increasing tax avoidance activity, on average. Moreover, companies that join an aggressive labor organization (‘Minju’ Federation) show a significantly higher level of tax avoidance activity, compared to those joining a moderate labor organization (‘Hanguk’ Federation). Furthermore, the authors show that such an effect of labor unions on tax avoidance is significant for companies, which are not affiliated with large business groups (‘chaebols’). This result suggests that chaebol group management is not under pressure to negotiate with union members due to higher reputation costs. The findings of this paper offer academic and practical implications that capital market participants need to understand labor unions’ effect on management’s accounting choices.
Highlights
The main purpose of accounting is to provide useful information for accounting information users’ decision making
This study examines the effect of labor unions on corporate tax avoidance activities
The authors show that such an effect of labor unions on tax avoidance is significant for companies, which are not affiliated with large business groups (‘chaebols’)
Summary
The main purpose of accounting is to provide useful information for accounting information users’ decision making. Accounting information users include a company’s stakeholders who are individuals or organizations that are related to a firm’s business activities or their outcomes, such as shareholders, creditors, customers, and workers. This study is focused on workers as a company’s internal stakeholder and accounting information users in labor-management negotiation. The authors examine the effect of labor unions, the workers’ negotiation power, on corporate tax avoidance activities. Corporate tax avoidance activities are classified into lawful tax reduction to reduce tax burden using the incompleteness of the tax law and tax evasion, which reduces tax cost by violating the tax law. Lawful tax avoidance within a legal boundary is a crucial strategic business activity to reduce the tax burden.
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