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Does social capital constrain firms’ tax avoidance?

Research output: Contribution to journalJournal article

Published
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<mark>Journal publication date</mark>2018
<mark>Journal</mark>Social Responsibility Journal
Issue number3
Volume14
Number of pages14
Pages (from-to)542-565
Publication statusPublished
Early online date20/08/18
Original languageEnglish

Abstract

Purpose
This paper aims to investigate whether the level of social capital of the region in which a firm is headquartered affects its tax avoidance activities. Social capital can be defined as the mutual trust in society and literature shows that firms headquartered in high social capital regions exhibit higher level of corporate social responsibility. Recent research suggests that some stakeholders consider tax avoidance as a socially irresponsible and illegitimate activity, whereas others deem corporate tax payments as detrimental to social welfare because they hurt economic development. Building on this debate, the relationship between social capital and tax avoidance is empirically investigated.

Design/methodology/approach
A sample of 52,962 firm-year observations over the period 1990-2014 was used to empirically investigate the relationship between social capital and tax avoidance.

Findings
Consistent with the idea that managers consider corporate tax payments as a socially responsible action, evidence was found that firms headquartered in areas with high social capital engage significantly less in tax avoidance activities. It was also documented that the negative impact of social capital on tax avoidance is stronger in the presence of high religiosity, high corporate performance and lower sensitivity of CEO’s compensation to stock volatility.

Originality/value
This paper extends research on social capital and improves the understanding of the effect of the social environment on managerial decision. Importantly, by studying the relationship between social capital and tax avoidance, the authors add to the recent debate on companies’ perception of the desirability of tax avoidance activities from a social viewpoint.

Bibliographic note

This article is (c) Emerald Group Publishing and permission has been granted for this version to appear here. Emerald does not grant permission for this article to be further copied/distributed or hosted elsewhere without the express permission from Emerald Group Publishing Limited.