Study: Investors Reward Either Tax Avoidance or Philanthropy, But Not Both Together

Chris Gaetano
Published Date:
Sep 5, 2019

A study of 3,000 public companies over a 14-year period has found that investors like firms that practice either tax avoidance or philanthropy, but they dislike firms that do both, according to The study's authors believe that when firms aggressively reduce their tax burden on the one hand but spend lavishly on corporate social responsibility on the other, investors perceive them as playing Robin Hood with their tax savings, rather than putting them toward more productive ends such as capital expenditures and research and development. 

While the paper, Market Valuation Consequences of Avoiding Taxes while also being Socially Responsible, paired tax avoidance with overall corporate social responsibility (CSR), it noted that investors didn't react poorly to measures like improving workplace conditions, product quality and corporate governance. Their ire was reserved specifically for philanthropic activities with little to no links to profit maximization, such as volunteer initiatives or charitable contributions for health, education, or human rights. While such projects can improve a firm's reputation and thus provide value in terms of public relations, this impact is blunted when the firm also engages in high levels of tax avoidance, as these activities are easily viewed as hypocritical exercises in impression management. 

In effect, the benefits of tax avoidance are cancelled out by philanthropic spending, and the benefits of philanthropic spending are cancelled out by tax avoidance. Consequently, while investors like both activities, they dislike them in combination. 

"We hypothesize that while equity market participants may positively value both CSR and tax avoidance, these two actions are viewed as inconsistent with one another when engaged upon contemporaneously, where increased activity of one diminishes the value of the other," said the study abstract. "Results, using a sample of U.S. public firms during years 2000-2013, support our expectation and show a negative interaction between CSR and tax avoidance."

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