Valuation Implications of Socially Responsible Tax Avoidance: Evidence from the Electricity Industry

Abstract

Prior literature suggests that firms may bear reputational costs associated with corporate tax avoidance, which could in turn reduce the net present value of firms’ tax planning strategies. Other research indicates that investors perceive corporate social responsibility (CSR) activities and tax avoidance as inconsistent with each other when engaged in concurrently. However, these studies do not consider the fact that firms may have opportunities to avoid tax in socially responsible ways. We investigate the equity valuation implications of one form of socially responsible tax avoidance: claiming the renewable electricity production tax credit (PTC). We predict and find that investors more positively value tax savings generated from PTCs compared to other forms of corporate tax avoidance. Additionally, consistent with the role that CSR can play in enhancing a firm’s reputational capital, we find evidence of a spillover effect in which investors more positively value other sources of tax avoidance to the extent the firm also reduces its taxes in a socially responsible way.