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Corporate
Corporate social responsibility, social
firm performance and tax risk responsibility
Xiaojun Lin
Southwest University of Political Science and Law, Chongqing, China, and
1101
Ming Liu, Simon So and Desmond Yuen
University of Macau, Taipa, Macao Received 30 April 2018
Revised 18 June 2019
Accepted 26 July 2019

Abstract
Purpose – The purpose of this study is to investigate whether corporate social responsibility (CSR) can
lower tax risk. Previous studies have demonstrated a negative link between CSR and tax aggressiveness.
Generally, corporations engaging in social irresponsibility tend to undertake aggressive tax planning;
whereas socially responsible firms enjoy tax savings. Because several recent studies have suggested that
lower tax payments do not necessarily create higher tax risk, an exploration of the relationship between CSR
and tax risk was not only interesting but also important.
Design/methodology/approach – Using an ethical perspective of CSR, this paper argues that executives
who are nourished by an ethical climate tend to make responsible and reliable operating decisions. Therefore, their
corporations would have better control of tax administration, and the corresponding tax risk would be
constrained. Such corporations would enjoy greater tax savings while keeping their tax risk at relatively low
levels. However, this reasoning ignores the fact that limited economic resources would constrain a firm from
practicing CSR in the form of donations. This situation would also influence its attitude toward tax strategies.
Specifically, when a firm’s performance is unsatisfactory, the cultural effect of CSR may diminish or even
disappear.
Findings – Firms donating additional resources to CSR activities can construct a more ethical work climate
that encourages executives to control tax risk while lowering tax expenses. For firms with unsatisfactory
performance, the ethical benefits of CSR could disappear, thus suggesting a relationship with firm
performance. This finding contributes to the knowledge on the ethical implications of CSR and proposes that
the culture argument is conditional on satisfactory firm performance.
Originality/value – This study explores the association between corporate culture (CSR) and tax risk. The
empirical results help shareholders, analysts and other investors to make their business decision better
because CSR or corporate culture is less likely to change suddenly or dramatically in an abbreviated time. The
finding of this study shed light on the importance of corporate culture on making an investment evaluation or
decision. In addition, this study extends the research on CSR by demonstrating that the effects of CSR are
conditioned on firm performance. The beneficial effect of CSR on tax risk would disappear when firms have
unfavorable financial performance.
Keywords CSR, Firm performance, Tax risk
Paper type Research paper

Introduction
Tax risk is a specific kind of uncertainty that has a significant influence on a firm’s perspective.
Drake et al. (2017) revealed that tax risk is closely related to future stock volatility and strongly
affects investors’ expectation. Hutchens and Rego (2013) showed that investors charge an extra
premium when corporations have higher tax uncertainty. In other words, a firm can enjoy a Managerial Auditing Journal
lower cost of capital if it reduces the possibility of unforeseen negative tax effects. Hutchens and Vol. 34 No. 9, 2019
pp. 1101-1130
Rego (2015) also recognized that the instability and volatility of a tax burden lead to higher firm © Emerald Publishing Limited
0268-6902
risk. DOI 10.1108/MAJ-04-2018-1868
MAJ Because tax risk has a significant negative effect on a corporation, most key stakeholders
34,9 are concerned about this issue. For example, financial scandals have resulted in auditors’
needing to meet higher requirements for providing financial information. Section 404
requires auditors to evaluate and to comment on the internal control system and
Sabanes–Oxley Act (SOX) limit on their non-audit services to ensure the accuracy and
reliability of their financial reports. A firm’s tax issues not only influence its financial
1102 information but also increase the legitimacy risks related to the auditors. Abernathy et al.
(2019) demonstrate that when firms engage in more risky tax planning activities, external
auditor would charge premium on audit fees to make up for the higher audit risk. It is vital
for the auditor to have an accurate estimate of the tax risk level before and during the
implementation of an auditing procedure.
Recent studies have indicated that paying lower taxes does not necessarily lead to an
increase in tax risk (Hamilton and Stekelberg, 2016; Guenther et al., 2016). It has been proposed
that a lower tax burden and tax risk can coexist. One finding was that the tax avoidance
technologies used by firms in the US constrain managers from extracting rents to such an
extent that their firms’ future performance could be compromised (Blaylock, 2016). This study
highlighted the possibility of reconsidering whether tax-saving practices lead to “true harm” in
an absolute sense. Considering both the effective tax rate (ETR) and tax risk, Gallemore and
Labro (2015) revealed that firms with excellent internal information environments had better
control of their tax administration systems and filed their tax returns in a timely and
appropriate manner. Consequently, firms with better internal information environments
reduced their tax burdens and the possible negative tax outcomes. Hamilton and Stekelberg
(2016) suggested that firms with excellent information technologies could enjoy more tax
savings and less tax risk than firms with less advanced information technologies.
To date, most studies on taxes have focused on tax aggressiveness. Analyses of tax risk
are limited. Because tax avoidance is not necessarily unmanageable, the level of tax risk
may be used as the basis for classifying the degree to which tax aggressiveness might be
acceptable. The research related to tax aggressiveness has already reached a saturation
point; thus, there is a need for the study of tax risk. For example, Neuman et al. (2018) realize
the importance of tax risk and investigate how tax practitioners and tax authorities care tax
risk. The determinants of tax risk deserve to be studied to enrich the tax literature.
The conclusions on the association between corporate social responsibility (CSR) and tax
aggressiveness are mixed. On the basis of the culture argument for CSR, firms that
increased their CSR activities were found to be more ethical and responsible; consequently,
they had a lower propensity to take contentious tax positions (Lanis and Richardson, 2012;
Lanis and Richardson, 2015). Contrary to this theory, CSR is viewed as an instrument for
gaining a good reputation to disguise a negative situation. Firms engaging in excessive CSR
are more likely to adopt aggressive tax strategies (Landry et al., 2013).
The present study explored the influence of CSR on tax risk. It expands the tax literature
and contributes to the understanding of the association between CSR and tax aggressiveness.
Davis et al. (2015) asserted that firms that increased their level of socially responsible
activities could lower their tax burden; however, this conclusion did not consider tax risk.
As was previously mentioned, tax risk is worthy of investigation. It can be an instrument for
determining whether a low tax burden (aggressive tax strategy) causes “true harm” to a
corporation. As would internal controls and high-tech systems, CSR can simultaneously
lower the ETR and tax risk. The beneficial effects of CSR on taxation would be persuasive;
therefore, they should be communicated. However, if the tax savings are exchanged by high
tax risk, the beneficial effects of CSR would be discounted, and the ethical theory of CSR,
which has been widely accepted, would be invalidated.
 The present study also analyzed the possible differences in the link between CSR and tax Corporate
risk for firms constrained by operational performance. When corporations are faced with social
poor earnings, socially irresponsible CSR leads to higher tax aggressiveness. However, this
negative effect diminishes or disappears with satisfactory operational performance (Watson,
responsibility
2015). In addition, the executives have the incentive and willingness to be responsible
because of intense competition and performance evaluations that are strongly linked to firm
performance. Gao et al. (2017) discovered that the relationship between social environment
and tax aggressiveness was more pronounced in firms with higher cash reserves, 1103
operational profitability and firm performance. The current study, therefore, posited that
CSR could reduce tax risk and that the effects might disappear for a company in a weak
financial position.
To draw a reliable conclusion, the research methodology was based on that of the most
closely related studies. The CSR variables were constructed in accordance with Davis et al.
(2015). Thus, CSR was measured as the difference between total strengths and total
concerns. In addition, tax risk was measured by the volatility of the ETR. Next, the effects of
CSR on tax risk were examined for the following conditions. First, increased pressure for
managers to achieve earnings targets, i.e. missed forecast earnings targets. Second, firms’
liquidity problems, i.e. low retained cash. Third, managers facing operational performance
pressures, i.e. operational losses. Because of the availability of CSR data in the MSCI
database (previously the KLD database), the sample period was 1995-2013.
First, the ability of CSR to reduce tax risk was estimated by controlling for the level of the
ETR. As was hypothesized, an increase in socially responsible activities tended to be
associated with lower tax risk. Specifically, a standard deviation increase of 1 per cent in the
CSR proxies resulted in a reduction of 1 per cent in the volatility of the ETR. An
economically vital determinant of tax risk, CSR is also negatively linked to the ETR
(Davis et al., 2015). These empirical results confirm the notion that CSR plays an ethical role
that extends to the work environment. The executives in such an environment would be
more reliable and responsible. They would also be diligent about simultaneously reducing
the tax burden and tax risk.
The conditions under which tax risk would be affected by CSR were investigated.
Interestingly, when the effect of CSR on the tax risk was conditional on unsatisfactory firm
performance, the coefficient of the CSR activities became insignificant: the coefficients were
very close to zero. Specifically, when firm performance met expectations, there was a
negative relationship between CSR activities and tax risk. The link between CSR and tax
risk disappeared for firms that had lower profitability, more missed analysts’ earnings
forecasts and more financial constraints. These results suggest that the influence of CSR on
tax risk tends to disappear in the presence of firm profitability, unsatisfactory performance
and financial constraints. A possible explanation is that good firm performance provides the
economic resources for the development of a CSR corporate culture that is manifested in
activities such as job creation and community donations. Consequently, managers would be
more apt to perform their duties responsibly and to pay more attention to managing the
firm’s tax risk. In contrast, when firms do not perform well, CSR activities might be used to
enhance or to maintain firm reputation. In addition, if managers insist on increasing the
investment in CSR activities when the firm has scarce economic resources, they would need
to exploit other resources to support these activities. For example, they would be more likely
to adopt an aggressive tax strategy to reduce the firm’s tax payments.
Robustness tests were performed to determine the association between CSR and tax risk.
First, the study used a comprehensive set of control variables and controls for the industry
and year fixed effects in their primary specifications. Second, the consistency of the results
MAJ with the use of alternative measures of the key variables was demonstrated. Finally, the
34,9 proposition was supported when both the lead–lag and first-difference specification were
applied and propensity score matching (PSM) analysis was performed.
This study makes several contributions. First, while a number of studies have
investigated the links between CSR and tax aggressiveness, this is the first to document the
extent to which CSR reduces the risk involved in firms’ tax-saving strategies. Several recent
1104 studies on corporate tax avoidance (Gallemore and Labro, 2015; Hamilton and Stekelberg,
2016) have considered tax aggressiveness and tax risk. This indicates that the discussion of
tax risk is relatively nascent in the literature; thus, the topic requires more attention. The
present study built on the work of Davis et al. (2015), who investigated only the association
between CSR and tax aggressiveness. It provides a new perspective on the influence of CSR
on corporate tax outcomes.
Second, Guenther et al. (2016) showed a positive relationship between tax risk (measured
as the volatility of the ETR) and firm risk (measured as future stock volatility). The present
study found a negative association between the CSR and tax risk. Given that the corporate
culture climate are less likely to change dramatically over a short period of time, the results
of this study will help shareholders, analysts, and other investors to make good business
estimation. The findings of this study will highlight the importance of the corporate culture
in investment evaluations or decision-making.
The present study also contributes to the research related to the business significance of
CSR. It identifies and quantifies the positive economic returns of CSR investments regarding
the corporate tax strategy. This study examined whether the association between CSR and
tax risk would diminish or even disappear if a corporation experiences financial constraints
and discovers that the effects of CSR are fragile in a situation of low profitability,
unsatisfactory performance and limited financial resources. It is, therefore, argued that CSR
can promote responsible behaviors in managers; however, this motivation may be futile in
an environment of financial constraints.
The findings could also have practical implications. Socially responsible activities
improve voluntary tax compliance and enhance tax administration efficiency. Thus, the key
stakeholders may attempt to increase or, at least, to preserve their socially responsible
activities. For example, Abernathy et al. (2019) recognize that external auditor would assess
its clients tax risk and charge a premium as the compensation for the higher risk.
Understanding the association between CSR and tax risk can help external auditor to better
assess its audit risk before engagement. The results also suggest that firm profitability,
unsatisfactory performance and financial constraints could have a detrimental influence on
CSR because they reduce or even erase its effects on tax risk.
This study documents that CSR, as a dimension of corporate culture, is related to the tax-
incentive strategy. This highlights the need for scholars and industrial practitioners to
consider CSR activities in formulating tax strategy. In addition, the present study’s
elucidation of the link between CSR activities and corporate tax strategies would be valuable
for standard setters and regulators.
The present study raises the question of whether a low ETR, a common measure of tax
aggressiveness, is really harmful to a corporation. Frischmann et al. (2008) and Rego and
Wilson (2012) defined an aggressive tax strategy as the undertaking of significant tax
positions that are backed by relatively weak supporting facts. Consistent with the
conclusions of Gallemore and Labro (2015), the present study suggests that future studies
consider tax risk in addition to the ETR to obtain a better measure of tax aggressiveness.
The remainder of this paper is arranged as follows: the next section presents the
literature review and hypothesis development. After that we introduce the research design
and presents the empirical results. The robustness tests and conclusion are provided in the Corporate
ending. social
responsibility
Literature review and hypothesis development
Tax risk is different from tax aggressiveness[1]. Tax risk is broadly defined as the “possible
unforeseen financial losses or unfavorable outcome caused by taxation issue, specifically,
some unforeseen negative factors in the taxation process.” Hutchens and Rego (2015)
demonstrated that a possible unfavorable outcome induces investors or analysts to assess a
1105
firm with higher risk. The stock price fluctuates to a greater extent when a firm’s tax risk is
higher than that of its peers. Hutchens and Rego (2013) revealed that tax-related
uncertainties result in an extra financing premium and a higher cost of equity. Improved
control of a firm’s tax risk can reduce the cost of equity financing and provide economic
benefits. Recent studies have proposed that a lower tax burden does not necessarily create
high tax risk; thus, increased tax savings and lower tax risk can coexist. Gallemore and
Labro (2015) noted that good internal information environments facilitated decision-making
that was based on accurate and reliable information. They found that if firms adopted better
tax strategies and filed the appropriate tax documentation, then the tax authorities viewed
their “aggressive” tax positions as less risky and were less likely to disallow them. Hamilton
and Stekelberg (2016) asserted that firms with excellent information technology systems can
reduce tax expenses and tax risk. Additionally, companies need to pay higher audit fee if
they engage in riskier tax planning activities (Abernathy et al., 2019). Given that tax risk
continues to receive the attention of practitioners and academics, an analysis of the
determinants of tax risk would be useful.
The link between CSR and tax aggressiveness has attracted the attention of accounting
scholars; thus, it has been widely studied in the past decades. A variety of sample and
research methods have been used to explore this interesting topic, and the findings have
been mixed. Using a sample of the public firms listed in Australia in 2008-2009, Lanis and
Richardson (2012) found that the firms that increased their CSR activities had a lower
propensity to engage in contentious tax positions. Specifically, higher levels of CSR
disclosure resulted in higher ETRs. Lanis and Richardson (2015) demonstrated that firms
with low CSR ratings attempted to experience tax disputes with the taxation authorities, i.e.
firms devoting more resources to CSR activities had a lower propensity to take contentious
tax positions. However, Landry et al. (2013) found that Canadian firms in the highest CSR
terciles engaged in more aggressive tax positions than those in the middle tercile.
Using a USA sample for the period 2003-2009, Hoi et al. (2013) determined that the firms
that exhibited excessive social irresponsibility practices had a higher propensity to adopt
aggressive tax strategies. Huseynov and Klamm (2012) also revealed that corporations with
higher irresponsible CSR ratings had lower ETRs. Although Hoi et al. (2013) and Huseynov
and Klamm (2012) suggested that irresponsible CSR firms (high CSR “concern”) engaged in
greater tax aggressiveness, they found no link between strong CSR programs and tax-
related outcomes. Interestingly, using the combined measure of CSR (strength minus
concern), Davis et al. (2015) note that a firm’s CSR rating was negatively related to its ETR.
The study advocated that tax payments substituted for, rather than complemented, CSR in
the US market. To complement the study of Davis et al. (2015), which focused on the level of
tax burden without the consideration of the possible unfavorable outcomes, the present
study investigated the effects of CSR on tax risk.
The research on CSR has yielded conflicting findings on its role and the mechanisms that
are involved. Some studies have concluded that CSR is an ethical obligation and that it
promotes a corporate culture that can motivate managers to engage in ethical behaviors,
MAJ such as higher earnings quality or less tax aggressiveness (Kim et al., 2012; Hoi et al., 2013).
34,9 Others have viewed responsible CSR activities as a tool to improve a firm’s reputation or to
disguise negative behaviors. On the basis of this instrumental argument, some empirical
studies have also indicated that CSR activities are used to create shareholder wealth
(McWilliams and Siegel, 2001) and to establish or to maintain a firm’s reputation and
positive image (Sallyanne Decker, 2004; Muttakin et al., 2015).
1106 In line with the culture argument, firms engaging in more socially responsible activities
would experience lower tax rates by benefiting from benign investments that could be tax
write-offs rather than resorting to the grey area of tax avoidance. Consequently, there would
be little, if any, risk of the firm’s being assessed for future taxes and penalties because of its
current tax payments. CSR nourishes an ethical culture that promotes responsible executive
behaviors.
The present study proposes that firms with a CSR culture would act more responsibly.
The executive officers are focused on tax compliance, especially tax law changes. They are
concerned with complicated business transactions, the timely filing of tax returns, and the
accuracy of tax calculations. Improved tax administration would encourage executives to
prevent the company from being affected by ambiguous and controversial interpretations.
Specifically, managers in socially responsible firms are more likely to identify ambiguous tax
legislation and to develop deep tax control to handle grey areas; to pay more attention to tax
administration procedures for the timely and appropriate filing of tax returns; to maintain
close connections with the tax department when setting up new business units to ensure tax
control and to minimize the company’s tax burden; and to stay up to date on inland revenue
department policies for the timely implementation of changes in tax regulations. The current
study, therefore, posited that CSR would have a significant negative effect on tax risk.
While proponents of the ethical obligation view of CSR have predicted a negative link
between CSR and tax risk, executives might engage in CSR practices for reputational
concerns rather than firm and stakeholder interests: the opportunistic use of CSR. CSR can
provide a positive signal of a firm’s reputation. It can be used to advance or to maintain a
corporation’s reputation or image (Fombrun and Shanley, 1990; Verschoor, 2005; Linthicum
et al., 2010). A positive reputation or image is very important. For example, a corporation’s
disappointing performance can be offset to some extent by a community donation. If the
instrument theory is supported, firms engaging in more social responsibility activities may
have a higher level of tax risk. Therefore, H1 is presented in null form:

H1. Irresponsible (responsible) CSR activities would be positively (negatively) related to

tax risk.
H1 was supported. CSR was found to have a significant weakening influence on tax risk;
however, not all corporations have the intention to comply with ethical behavior. For
example, executives have incentives to lower the tax burden to increase cash flows. This is
also often a preference. When executives are faced with unfavorable operational outcomes or
are under pressure to meet outsiders’ expectations, they are more likely to forgo
considerations of the firm’s long-term value to focus on the achievement of current
profitability targets.
Waddock and Graves (1997) have suggested that corporations that control vast economic
resources have a higher propensity to expend those resources on “doing well by doing
good.” Such benefit distributions can improve overall performance. Campbell (2007)
asserted that corporations attempt to violate social expectations when they experience
economic recessions, operate in unsatisfactory regulatory environments and face intense
competition. Corporations with abundant economic slack may be willing to engage in
genuine CSR activities. This could cultivate an ethical climate and have a long-term Corporate
influence on managers. However, firms with limited or scarce economic resources may have social
a lower propensity to engage in genuine CSR activities and may be more likely to adopt
them merely to conceal negative events. Lys et al. (2013) showed that CSR spending was
responsibility
heavily dependent on operational performance and future earnings. Waddock and Graves
(1997) asserted that firms with abundant economic resources have more freedom to expend
resources on CSR.
CSR was expected to have a positive effect on firms with good performance; however, 1107
this would diminish with bad performance. If firms achieve good financial performance and
have the resources to engage in socially responsible activities, then their CSR activities could
reduce their tax risk, as proposed in H1. However, for firms with bad financial performance
and inadequate economic resources, the CSR activities may not fulfill their (CSR) intrinsic
ethical value objectives. Instead, the activities will serve only to disguise the negative effects
of poor financial performance. These predictions led to the following hypothesis:

H2. Earnings performance would moderate the relationship between CSR and tax risk.

Research design
Primary specification
Following Gallemore and Labro (2015), this study used the volatility of the ETR to measure
tax risk. To calculate the volatility of the ETR, the cash ETR, which represents the current
taxes paid, was first calculated. To ensure a reasonable economic interpretation of the tax
rates, the cash ETRs were winsorized to values between 0 and 1. However, the observations
with negative pretax incomes were not set as missing because of the need to determine the
effects of CSR on tax risk in situations of profit and loss. Next, the volatility of the ETR was
calculated by the use of the standard deviation of the annual ETR with a rolling five-year
window ending in year t.
A public information source, the MSCI database[2] (formerly the KLD database) provides
tools for assessing a corporation’s social performance[3]. With their positive (Strengths) and
negative (Concerns) indicators, MSCI data have been widely used in academic studies
(Kim et al., 2012; Hoi et al., 2013; Davis et al., 2015).
The CSR index was constructed on the basis of the method of Davis et al. (2015). The
difference between strengths (responsible activities) and concerns (irresponsible activities)
covered all dimensions excluding corporate governance and human rights. Corporate
governance was excluded because its relationship with tax outcomes has been well-
investigated. The CSR score was constructed by allocating one point for each strength and
retrieving one point for each concern. To provide a convincing conclusion, the control variables
were established in accordance with Gallemore and Labro (2015) and Hamilton and Stekelberg
(2016), who investigated the determinants of tax risk. In addition to this list of control variables,
the institutional ownership is also considered to measure corporate governance.
The control variables in this study were firm size (the natural logarithm of total assets),
property, plant and equipment (PPE/total assets), change in PPE (4PPE/total assets),
leverage ((long-term debt þ short-term debt) = total assets), intangible assets (intangible
assets =total assets), research and development (R&D) expenses (R&D expenses/net sales),
net operating loss (NOL; NOL carryforward/total assets), NOL Dummy (dummy variable =
1 if the observation had a net operating loss carryforward), extraordinary item
(extraordinary items/total assets), foreign income (absolute value of pretax foreign income/
the absolute value of total pretax income), foreign income dummy (dummy = 1 if pretax
foreign income > 0), return on assets (ROA), market-to-book (MB) ratio, sales growth
MAJ (percentage change of sales), firm age (natural logarithm of firm age) and institutional
34,9 ownership (percentage of shares held by institutional owners). The year and industry fixed
effects were also included to control for annual changes across industries.
The following primary specification was used to examine H1:
X X
Riskit ¼ b 0 þ b 1 * CSRit þ k
b k Controlk;it þ b Industry Fixed Effecti
j j
1108 X
þ l
b l Year Fixed Effectst þ « i;t (1)

According to H1, CSR activities would encourage managers to perform their professional
duties and to try to reduce tax risk. Thus, the coefficients of CSR, b 1 , would be negative in
the empirical results. Consistent with H1, the coefficient of CSR continued to be negative.
The coefficient of the interaction terms of CSR and firm performance were positive;
therefore, the effects of CSR when firm performance is below expectations would diminish or
disappear.
To test H2, the work of previous studies was extended to investigate whether the effects
of CSR on tax risk were conditional on firm performance. The study incorporated an
interaction term to capture the combined action of CSR and firm performance on tax risk.
Through the use of the ROA dummy, cash flow dummy and earnings exceed analyst
forecast dummy, the observations were separated into two sub-groups for each year. When
the firm performance (ROA = cash flow = earnings exceed analyst forecast) of the
observation was higher than the annual median level, its financial condition was regarded
as satisfactory performance. If CSR was negatively linked to tax risk when the current
financial performance was average or high and if such an effect disappeared when the
current financial performance was below the average level, then the coefficient of CSR would
be significantly negative. The coefficient of the interaction term would be significantly
positive, thus suggesting that the negative effects of CSR would diminish or disappear for
firms with poor performance:

Riskit ¼ b 0 þ b 1 *CSRit þ b 2 * CSRit * Performanceit

X X
þ b 3 *Performanceit þ b Controlk;it þ
k k
b Industry Fixed Effecti
j j
X
þ l b l Year Fixed Effectst þ « i;t (2)

Sample and descriptive statistics

The financial data were obtained from Compustat, and the CSR data came from MSCI. The
research and development expenses (XRD), advertising expenses (XAD) and sales, general
and administrative expenses (XSGA) were indicated as zero if they were missing in the
Compustat data.
The sample was limited to 1995-2013 because this is the only period for which the CSR
index from the MSCI database was accessible. Observations with a missing value in each of
the key variables and control measures were excluded. Observations in the financial (SIC
codes 6000-6999) and utilities (SIC codes 4900-4999) industries were deleted from the sample.
Table I contains the sample distribution based on the fiscal year (Panel A) and the Fama–
French 48 industries classification (Panel B). The number of firms increased steadily from
316 to 1,241 during the sample period (Table I). The sample industrial distribution varied
 Corporate
Fiscal Year Year frequency Percentage Cumulative percentage
social
Panel A: Sample distribution by year group responsibility
1995 316 1.98 1.98
1996 321 2.01 3.99
1997 319 2 5.99
1998 317 1.99 7.98
1999 321 2.01 9.99 1109
2000 277 1.74 11.72
2001 461 2.89 14.61
2002 497 3.11 17.73
2003 1,097 6.87 24.6
2004 1,207 7.56 32.16
2005 1,095 6.86 39.02
2006 1,106 6.93 45.95
2007 1,090 6.83 52.78
2008 1,162 7.28 60.06
2009 1,234 7.73 67.79
2010 1,298 8.13 75.93
2011 1,298 8.13 84.06
2012 1,303 8.16 92.22
2013 1,241 7.78 100
Total 15,960 100
Panel B: Sample distribution by Fama-French 48 industry code
Industries Industry frequency Industry percentage Cumulative percentage
Agriculture 46 0.29 0.29
Food products 347 2.17 2.46
Candy and soda 36 0.23 2.69
Beer and liquor 84 0.53 3.21
Tobacco products 39 0.24 3.46
Recreation 122 0.76 4.22
Entertainment 249 1.56 5.78
Printing and publishing 233 1.46 7.24
Consumer goods 356 2.23 9.47
Apparel 291 1.82 11.3
Healthcare 276 1.73 13.03
Medical equipment 492 3.08 16.11
Pharmaceutical products 893 5.6 21.7
Chemicals 563 3.53 25.23
Rubber and plastic products 109 0.68 25.91
Textiles 42 0.26 26.18
Construction materials 387 2.42 28.6
Construction 258 1.62 30.22
Steel works electricity 308 1.93 32.15
Fabricated products 37 0.23 32.38
Machinery 811 5.08 37.46
Electrical equipment 283 1.77 39.24
Automobiles and trucks 343 2.15 41.38
Aircraft 154 0.96 42.35
Shipbuilding, railroad equipment 62 0.39 42.74
Defense 51 0.32 43.06
Precious metals 60 0.38 43.43
Non-metallic and industrial metal mining 86 0.54 43.97 Table I.
(continued) Sample distribution
MAJ
34,9 Fiscal Year Year frequency Percentage Cumulative percentage

Coal 41 0.26 44.23

Petroleum and natural gas 795 4.98 49.21
Communication 446 2.79 52.01
Personal services 271 1.7 53.7
1110 Business services 1,796 11.25 64.96
Computers 676 4.24 69.19
Electronic equipment 1,164 7.29 76.48
Measuring and control equipment 447 2.8 79.29
Business supplies 337 2.11 81.4
Shipping containers 97 0.61 82.01
Transportation 462 2.89 84.9
Wholesale 578 3.62 88.52
Retail 1,301 8.15 96.67
Restaurants, hotels, motels 315 1.97 98.65
Almost nothing 216 1.35 100
Total 15,960 100

Note: This Table reports the sample distribution based on the fiscal year and Fama-French 48 industries
Table I. classification

widely, and the top five industries were 37.37 per cent of the sample. Based on the industry
distribution, it is impossible that the top five industries would dominate the results.
The descriptive statistics are shown in Table II The key variable tax risk (cash ETR
volatility) had a mean (median) of 15.3 per cent (10.2 per cent) with a standard deviation of
13.7 per cent. The CSR score ranged from 9 to 17, with a mean (median) of 0.152 (0).
Therefore, more than half of the observations had .engaged in responsible CSR activities. In
addition, more than half of the CSR scores ranged from 1 to 1 (1 to 1 in the 25th-75th
percentiles). To make the variables more consistent with the tax risk, the average CSR was
calculated from the years t  4 to t. The average CSR was more central focused and ranged
from 7 to 15.6. The mean value of the average CSR was closer to zero (0.093). These
average calculations resulted in sample attrition; thus, the number of observations dropped
to 10,018 from the original 15,960. The mean of the five-year average cash ETR was 41.1 per
cent; thus, on average, the firms needed to pay more than 40 cents in taxes for each dollar
earned. The high average level of tax payment could be the result of an extremely high tax
burden. As Table II shows, more than 75 per cent of the observations had a tax burden lower
than 21.8 per cent, which was largely consistent with the US market condition.
All the control variables were the average numbers over five-year periods. The
descriptive statistics of the control variables were largely consistent with those of previous
studies.
On a univariate basis, CSR and average CSR were negatively correlated with tax risk,
with correlations of 0.082 and 0.108, respectively. Unsurprisingly, CSR was highly
correlated with the average CSR, with a correlation of 0.875.
The results show that CSR and average CSR were also significantly and negatively
related to cash ETR volatility, a result that was consistent with the proposition in this study.
It suggests that firms engaging in more socially responsible activities would have a lower
level of tax risk. The results of the correlation preliminarily supported the proposition in this
study. This study is similar to that of Davis et al. (2015), who investigated the link between
CSR and tax aggressiveness. Using the cash ETR, they found that firms used tax payments
 N Mean SD Minimum p25 p50 p75 Maximum
Corporate
social
Panel A: Descriptive statistics responsibility
Cash ETR volatility 15,960 0.153 0.137 0.000 0.052 0.102 0.218 0.547
CSR 15,960 0.152 2.496 9 1 0 1 17
Average CSR 10,018 0.093 2.321 7 1.2 0.4 1 15.6
Cash ETR 15,960 0.411 0.326 0.000 0.197 0.296 0.445 1.000
Average Size 15,960 7.193 1.511 4.093 6.071 7.043 8.151 11.844 1111
Average PPE 15,960 0.277 0.219 0.010 0.106 0.212 0.394 0.893
Average 4PPE 15,960 0.021 0.042 0.066 0.001 0.010 0.031 0.268
Average leverage 15,960 0.184 0.170 0.000 0.039 0.157 0.275 0.906
Average intangibles 15,960 0.165 0.172 0.000 0.023 0.109 0.258 0.763
Average R&D expense 15,960 0.039 0.068 0.000 0.000 0.004 0.050 0.456
Average NOL dummy 15,960 0.423 0.442 0 0 0.2 1 1
Average 4NOL 15,960 140.236 433.309 0.012 0.000 3.063 72.011 5379.252
Average extraordinary items 15,960 0.001 0.008 0.062 0.000 0.000 0.000 0.045
Average foreign income 15,960 0.390 0.814 0.000 0.000 0.106 0.491 8.585
Average foreign income dummy 15,960 0.579 0.468 0 0 1 1 1
Average ROA 15,960 0.065 0.115 0.538 0.025 0.074 0.125 0.407
Average MB 15,960 3.288 3.957 18.618 1.669 2.486 3.858 45.838
Average sales growth 15,960 0.138 0.219 0.197 0.033 0.089 0.174 2.557
Average firm age 15,960 2.991 0.705 1.316 2.478 2.993 3.637 4.127
Average institutional ownership 15,960 24.906 35.609 0.739 7.878 11.175 20.707 260.762

Notes: Panel A reports the descriptive statistics of the sample. All other variables are defined in Table II.
Appendix 2 Sample summaries

as substitutes for, rather than complements to, CSR. Specifically, an increase in CSR led to a
reduction in the ETR and an increase in tax lobbying expenditures. The descriptive
statistics provide preliminary support for the conclusions of Davis et al. (2015) (Table III).

Empirical results
To examine whether corporations engaging in more CSR activities can achieve more
favorable tax-saving outcomes, the mean of the tax risk was presented for each CSR level[4].
The cash ETR volatility gradually decreased over the various CSR levels (Figure 1). The
negative relationship between CSR and tax risk is presented in Figure 1.
To investigate whether corporations with a higher level of social responsibility could
lower their tax risk (H1), equation (1) was estimated by using cash ETR volatility and CSR
as the dependent and independent variables, respectively. The full set of control variables
and indicators for the industry and year fixed effects are also provided in equation (1).
Table IV shows a negative link between CSR activities and tax risk. Both CSR and the
average CSR were negatively related to tax risk, the volatility of cash ETRS. This
relationship was statistically significant at the 10 and 5 per cent p-value levels. Additionally,
a one-standard deviation increase in CSR (average CSR) led to an approximately 1.6 per cent
(3 per cent) reduction in the sample mean of cash ETR volatility. Therefore, when firms
cultivate a responsible CSR culture, the managers would be more likely to honor their
obligations and to create the conditions for lower tax risk. Combined with the conclusions of
Davis et al. (2015), the results (Table IV) indicate that firms that are more engaged in socially
responsible activities are able to control the associated tax risk level and benefit from a
greater reduction in tax expenses. Generally, the coefficients of the control variables were
matched with those of prior studies at a significant level.
 34,9
MAJ

1112

Table III.
Correlation matrix
1 2 3 4 5 6 7 8 9 10
Cash ETR Average Average Average Average Average Average R&D
volatility CSR CSR Cash ETR size PPE Average 4PPE leverage intangibles expense

1 1
2 0.082*** 1
3 0.108*** 0.875*** 1
4 0.450*** 0.083*** 0.105*** 1
5 0.058*** 0.282*** 0.267*** 0.101*** 1
6 0.014* 0.072*** 0.108*** 0.014* 0.216*** 1
7 0.065*** 0.060*** 0.103*** 0.085*** 0.050*** 0.497*** 1
8 0.010 0.070*** 0.091*** 0.046*** 0.270*** 0.299*** 0.055*** 1
9 0.061*** 0.019** 0.031*** 0.108*** 0.127*** 0.390*** 0.191*** 0.181*** 1
10 0.036*** 0.056*** 0.082*** 0.210*** 0.290*** 0.345*** 0.156*** 0.184*** 0.113*** 1
11 0.052*** 0.004 0.012 0.027*** 0.015* 0.117*** 0.080*** 0.088*** 0.142*** 0.117***
12 0.008 0.096*** 0.074*** 0.046*** 0.304*** 0.012 0.047*** 0.148*** 0.051*** 0.047***
13 0.007 0.040*** 0.039*** 0.004 0.007 0.014* 0.036*** 0.033*** 0.003 0.070***
14 0.120*** 0.029*** 0.019* 0.002 0.090*** 0.094*** 0.107*** 0.001 0.033*** 0.059***
15 0.002 0.157*** 0.168*** 0.099*** 0.237*** 0.207*** 0.191*** 0.116*** 0.116*** 0.055***
16 0.198*** 0.150*** 0.153*** 0.375*** 0.184*** 0.077*** 0.179*** 0.209*** 0.004 0.456***
17 0.071*** 0.131*** 0.160*** 0.008 0.007 0.089*** 0.027*** 0.091*** 0.055*** 0.154***
18 0.017** 0.056*** 0.059*** 0.109*** 0.189*** 0.080*** 0.296*** 0.029*** 0.053*** 0.336***
19 0.026*** 0.134*** 0.143*** 0.081*** 0.458*** 0.105*** 0.147*** 0.046*** 0.010 0.217***
20 0.004 0.079*** 0.067*** 0.008 0.170*** 0.107*** 0.094*** 0.003 0.174*** 0.026***

Notes: Panel B reports the Pearson correlations. The ***, ** and * represent significance at the 1, 5 and 10% levels, respectively. All other variables are defined
in Appendix 2
(continued)
 11 12 13 14 15 16 17 18 19 20
Average
Average Average Average foreign Average Average
NOL Average extraordinary foreign income Average Average sales Average institutional
dummy 4NOL items income dummy ROA MB growth firm age ownership

1
2
3
4
5
6
7
8
9
10
11 1
12 0.365*** 1
13 0.029*** 0.01 1
14 0.101*** 0.058*** 0.011 1
15 0.150*** 0.079*** 0.031*** 0.395*** 1
16 0.210*** 0.138*** 0.017** 0.065*** 0.102*** 1
17 0.033*** 0.010 0.007 0.044*** 0.015* 0.149*** 1
18 0.026*** 0.001 0.014* 0.076*** 0.162*** 0.225*** 0.138*** 1
19 0.067*** 0.085*** 0.023*** 0.085*** 0.223*** 0.175*** 0.047*** 0.312*** 1
20 0.139*** 0.069*** 0.013 0.012 0.095*** 0.132*** 0.064*** 0.012 0.166*** 1

Table III.
social

1113
Corporate

responsibility
MAJ H1 was supported; thus, socially responsible activities have a significant effect on tax risk.
34,9 Top executives may not always have the incentive or ability to comply with a firm’s ethical
values. Previous studies have suggested that under certain conditions, companies have a
higher propensity to act in ways that violate societal expectations. Therefore, the current
study proposes that the effects of CSR may be related to firm performance.
0.25
1114
0.2
Volatility of Cash ETRs

0.15

0.1

0.05

Figure 1.
The trend of tax risk 0
–7 –6 –5 –4 –3 –2 –1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Cash ETR volatility Cash ETR volatility

CSR 0.001* (1.72)

Average CSR 0.002** (2.17)
Cash ETR 0.189*** (19.96) 0.188*** (16.93)
Average size 0.000 (0.62) 0.000 (0.42)
Average PPE 0.010 (0.73) 0.020 (0.90)
Average 4PPE 0.020 (0.38) 0.030 (0.44)
Average leverage 0.03 (1.29) 0.041** (2.02)
Average intangibles 0.037*** (2.92) 0.046*** (3.17)
Average R&D expense 0.274*** (5.33) 0.278*** (4.31)
Average NOL dummy 0.013*** (2.78) 0.011** (1.99)
Average 4NOL 0.000** (2.54) 0.000** (2.51)
Average extraordinary items 0.340 (1.25) 0.937*** (2.75)
Average foreign income 0.018*** (7.36) 0.022*** (7.87)
Average foreign income dummy 0.000 (0.10) 0.000 (0.61)
Average ROA 0.089*** (2.72) 0.171*** (5.51)
Average MB 0.001** (1.98) 0.000 (0.46)
Average sales growth 0.029** (2.35) 0.02 (0.82)
Average firm age 0.000 (0.13) 0.000 (0.23)
Average institutional ownership 0.000*** (4.00) 0.000 (1.63)
Coef. 0.080*** (3.10) 0.105*** (3.40)
Year F.E. Yes Yes
Industry F.E. Yes Yes
No. of observations 15,960 10,018
R2 25.10% 29.00%

Notes: This table presents the results of estimating equation 1 via OLS with cash ETR volatility as the
dependent variable, where Cash ETR volatility is measured as the standard deviation of the Cash ETR over
a five-year period, from year t  4 to year t. The independent variables are CSR and average CSR in
Table IV. Columns (1) and (2), respectively. All other variables are defined in Appendix 2. Coefficients are presented
The effect of CSR on with firm- and year-clustered standard errors in parenthesis. ***, ** and * denote significance at a 1, 5 and
tax risk 10 per cent level for two-tailed tests
The dummy variables dummy ROA, dummy cash flow and dummy earnings exceed Corporate
analyst forecast were used to generate an interaction term with CSR. Through the use social
of these dummy variables, the full sample was divided into two groups:
underperforming firms and firms with average or good performance. Table V shows
responsibility
the results for equation (2). The coefficient of CSR represented the effects of CSR on
tax risk when a firm had average or good performance. The empirical results show
that CSR was negatively and significantly related to tax risk when firms had satisfied
or exceeded performance expectations at the 5 per cent or 1 per cent p-value level. The 1115
coefficients of the interaction terms indicate the additional effects of CSR on firms
with unsatisfactory or disappointed performance. According to the proposition in this
study, when firms operate in unhealthy economic conditions, the executive officers
would be unwilling to follow the ethical performance guidelines; thus, the ethical
effects of CSR could diminish or even disappear. It was posited that the coefficients of
interaction, b 1 ; would be significantly positive. It was also posited that the total

Earning exceed analyst

ROA Dummy Cash flow dummy forecast dummy

CSR 0.002** (2.34) 0.001** (2.12) 0.002*** (2.79)

High interaction*CSR 0.002* (1.84) 0.001 (1.13) 0.002** (2.19)
High interaction 0.027*** (7.77) 0.011*** (3.86) 0.008*** (2.79)
High interaction þ high interaction*CSR 0.000 (0.752) 0.000 (0.785) 0.000 (0.92)
Cash ETR 0.189*** (19.82) 0.188*** (19.91) 0.191*** (20.43)
Average size 0.001 (0.58) 0.001 (0.65) 0.001 (0.67)
Average PPE 0.008 (0.52) 0.004 (0.25) 0.013 (0.82)
Average 4PPE 0.015 (0.28) 0.006 (0.11) 0.028 (0.53)
Average leverage 0.03 (1.57) 0.026 (1.37) 0.026 (1.34)
Average intangibles 0.036*** (2.84) 0.036*** (2.83) 0.040*** (3.10)
Average R&D expense 0.246*** (4.75) 0.257*** (4.91) 0.275*** (5.28)
Average NOL dummy 0.013*** (2.77) 0.013*** (2.80) 0.015*** (2.98)
Average 4NOL 0.000*** (2.59) 0.000*** (2.59) 0.000*** (2.60)
Average extraordinary items 0.414 (1.53) 0.325 (1.20) 0.440* (1.71)
Average foreign income 0.016*** (6.92) 0.017*** (7.25) 0.018*** (7.66)
Average foreign income dummy 0.001 (0.28) 0.001 (0.20) 0.000 (0.10)
Average ROA 0.023 (0.62) 0.066* (1.83) 0.082** (2.37)
Average MB 0.001* (1.71) 0.001* (1.86) 0.001* (1.91)
Average sales growth 0.024* (1.86) 0.028** (2.24) 0.028** (2.20)
Average firm age 0.000 (0.04) 0.001 (0.19) 0.001 (0.23)
Average institutional ownership 0.000*** (3.76) 0.000*** (3.85) 0.000*** (3.92)
Coef. 0.054 (1.54) 0.051* (1.79) 0.030 (1.00)
Year F.E. Yes Yes Yes
Industry F.E. Yes Yes Yes
No. of observations 15,960 15,958 15,704
R2 25.80% 25.20% 25.70%

Notes: This table presents the results of estimating equation (2) via OLS with cash ETR volatility as the
dependent variable, where ETR volatility is measured as the standard deviation of the ETR over a five-year
period from year t4 to year t. The variable of interest, CSR, is the difference between strength and concern. Table V.
The interaction terms are net income, operating cash flow and the difference between earnings and analyst
forecast earnings in Columns (1)-(3), respectively. All other variables are defined in Appendix 2. Coefficients The effect of CSR on
are presented with firm- and year-clustered standard errors in parenthesis. ***, ** and * denote significance tax risk based on
at a 1, 5 and 10 per cent level for two-tailed tests firm performance
MAJ coefficient of b 1 þ b 2 would be extremely close to 0; thus, none of the coefficients
34,9 would significantly affect tax risk.
Consistent with expectations, the results also indicated that this significant negative
effect diminishes for underperforming firms. Thus, in a situation of good firm
performance, CSR activities tended to be associated with lower tax risk. However, if a
donation to the community or society was made from insufficient economic resources,
1116 then the reason for the donation might not be ethical. Overall, the empirical results
supported H2.

Additional tests
To corroborate the findings, alternative measures of the key variables, tax risk and CSR,
were used to re-estimate the regression. First, GAAP ETR volatility was used as a proxy for
tax risk. The empirical results are presented in Panel A of Table VI. Specifically, both CSR
and the average CSR were significantly and negatively associated with the GAAP ETR
Volatility. This was consistent with the conclusions.
Second, all seven CSR categories[5] were used to create an alternative measure of CSR,
which had a significant attenuating effect on tax risk. Additionally, the effect of CSR was
stronger on the GAAP ETR volatility than on the cash ETR volatility in both extent and
significance.
As was previously mentioned, Davis et al. (2015) and Hoi et al. (2013) investigated
the relationship between CSR and tax aggressiveness. However, the two studies did not
use the same samples, CSR types or tax avoidance proxies, thus the inconsistent
findings. To provide a more nuanced conclusion regarding the effect of CSR on tax risk,
the method of Davis et al. (2015) was followed in the main test. The possible influence of
socially responsible or irresponsible activities on tax risk was also investigated. The
main regression was rerun, and CSR was replaced with average strength and average
concern (Panel C of Table VI). Interestingly, the effects of CSR on Cash ETR Volatility
stemmed from socially irresponsible activities. The coefficient of average strength on
cash ETR volatility was insignificant. However, both average strength and average
concern had a significant effect on GAAP ETR volatility. The coefficient of strength
was negative, and that of concern was positive. This result was consistent with the
proposition that socially responsible activities could promote good, responsible
executive behavior.
In addition to the alternative measures of the key variables, the regression was rerun
with additional controls to exclude the possibility that the omitted firm characteristics could
have influenced the result. Previous studies have demonstrated that sales volatility, sales
growth volatility, cash flow volatility, cash holdings, corporate governance, tax benefits,
sales, general and administrative expenses, and the number of employees affect the tax
outcome, which could also influence tax risk. Therefore, the regression was rerun with these
additional control variables (Panel A of Table VI). After the additional controls were
considered, the effects of CSR on tax risk were still significantly lower after controlling for
the tax burden (ETR).
Equation (1) was re-estimated by replacing the current year’s CSR with the previous
year’s. This specification could determine the possible predictive power of previous CSR on
tax risk in the current year (Panel B of Table VI). The previous year’s CSR was found to be
predictive of the current year’s tax risk. This addressed the concerns that the relationship
(Table IV) was merely the result of shocks in the business environment that simultaneously
influenced the values for CSR and tax risk. In other words, CSR activities had a sticky
 GAAP ETR volatility GAAP ETR volatility
Corporate
social
Panel A: GAAP ETR volatility of tax risk responsibility
CSR 0.003*** (3.94)
Average CSR 0.004*** (4.06)
GAAP ETR 0.206*** (8.17) 0.195*** (8.69)
Control variables Yes Yes
Year F.E. Yes Yes 1117
Industry F.E. Yes Yes
No. of observations 15,960 10,018
R2 23.50% 26.40%
Panel B: Seven categories CSR index
Cash ETR volatility GAAP ETR volatility
CSR 0.001** (1.98) 0.003*** (4.49)
Cash ETR 0.185*** (20.02)
GAAP ETR 0.185*** (8.75)
Control variables Yes Yes
Year F.E. Yes Yes
Industry F.E. Yes Yes
No. of observations 15,001 15,001
R2 24.20% 22.60%
Panel C: Strength and concern as CSR index
Cash ETR volatility GAAP ETR volatility
Average strength 0.001 (0.80) 0.003** (2.55)
Average concern 0.005*** (2.98) 0.007*** (3.49)
Cash ETR 0.187*** (16.78)
GAAP ETR 0.193*** (8.77)
Control variables Yes Yes
Year F.E. Yes Yes
Industry F.E. Yes Yes
No. of observations 10,018 10,018
R2 29.10% 26.50%

Notes: This table presents the results of re-estimating equation (2) via OLS with alternative measures of
key variables. In Panel A, GAAP ETR volatility is the dependent variable, where GAAP ETR volatility is
measured as the standard deviation of the GAAP ETR over a five-year period, from year t4 to year t. The
independent variables are CSR and average CSR in Columsn (1) and (2), respectively. In Panel B, the
variable of interest, CSR, is replaced by the CSR in measured in all categories: corporate governance,
employee relations, environment, community, diversity, human rights and product quality and safety. In
Panel C, the independent variables are replaced by the Strength and Concern in five categories:
communities, diversity, employee relations, environment and product. All other variables are defined in Table VI.
Appendix 2. Coefficients are presented with firm- and year-clustered standard errors in parenthesis. ***, ** Alternative measures
and * denote significance at a 1, 5 and 10 per cent level for two-tailed tests of key variables

influence on tax risk. Involvement in irresponsible CSR activities had a negative and
possibly lasting effect on the tax risk.
Listing all the unobservable firm characteristics in the primary regression was not
possible. The model of the first differences was estimated to mitigate any specific effect that
was relatively stable over time. Panel C of Table VI shows that the coefficient on CSR[6] in
the first-difference model was significantly negative for both cash and GAAP ETR
volatility.
 34,9
MAJ

1118

Table VII.
Additional test
Cash ETR volatility Cash ETR volatility GAAP ETR volatility GAAP ETR volatility
Panel A: Additional control variables
CSR 0.001* (1.73) 0.003*** (3.35)
Average CSR 0.002** (2.04) 0.004*** (3.69)
Cash ETR 0.187*** (16.21) 0.186*** (16.35)
GAAP ETR 0.203*** (9.02) 0.202*** (9.01)
Average size 0.000 (0.06) 0.000 (0.07) 0.002 (0.48) 0.002 (0.64)
Average PPE 0.01 (0.46) 0.009 (0.46) 0.056*** (2.97) 0.056*** (2.93)
Average 4PPE 0.036 (0.46) 0.036 (0.47) 0.009 (0.15) 0.009 (0.15)
Average leverage 0.045** (2.16) 0.045** (2.19) 0.028 (1.61) 0.027 (1.55)
Average intangibles 0.038** (2.41) 0.038** (2.40) 0.069*** (3.96) 0.069*** (3.93)
Average R&D expense 0.285*** (4.12) 0.283*** (4.10) 0.296*** (5.19) 0.294*** (5.18)
Average NOL dummy 0.012** (2.02) 0.012** (2.04) 0.012* (1.89) 0.012* (1.92)
Average 4NOL 0.000** (2.41) 0.000** (2.41) 0.000 (1.02) 0.000 (1.04)
Average extraordinary items 0.952*** (2.69) 0.954*** (2.70) 0.256 (0.64) 0.255 (0.64)
Average foreign income 0.022*** (7.79) 0.022*** (7.79) 0.027*** (6.16) 0.027*** (6.17)
Average foreign income dummy 0.003 (0.56) 0.003 (0.53) 0.001 (0.23) 0.001 (0.17)
Average ROA 0.183*** (5.98) 0.183*** (5.98) 0.288*** (10.33) 0.288*** (10.43)
Average MB 0.000 (-0.52) 0.000 (-0.50) 0.001 (1.59) 0.001 (1.57)
Average sales growth 0.029 (1.34) 0.029 (1.36) 0.072*** (4.17) 0.072*** (4.25)
Average firm age 0.001 (0.20) 0.001 (0.22) 0.001 (0.20) 0.001 (0.15)
Average institutional ownership 0.000 (1.55) 0.000 (1.49) 0.000 (0.27) 0.000 (0.19)
Sales volatility 0.000 (1.11) 0.000 (1.05) 0.000*** (2.67) 0.000*** (2.60)
Sales growth volatility 0.000*** (3.34) 0.000*** (3.35) 0.000 (0.09) 0.000 (0.11)
Cash flow volatility 0.104* (1.67) 0.105* (1.69) 0.100* (1.69) 0.102* (1.74)
Cash 0.01 (0.48) 0.009 (0.48) 0.071*** (4.38) 0.071*** (4.37)
CG 0.000 (-0.05) 0.000 (0.11) 0.007** (2.09) 0.006* (1.88)
Tax benefit 0.909** (2.20) 0.914** (2.22) 1.244*** (2.99) 1.255*** (3.04)
SG&A expense 0.001 (0.07) 0.000 (0.00) 0.027** (2.21) 0.028** (2.29)
Employee 0.001 (0.49) 0.002 (0.55) 0.007*** (2.80) 0.008*** (2.89)
Coef. 0.101*** (2.60) 0.098** (2.47) 0.265*** (4.25) 0.260*** (4.17)
Year F.E. Yes Yes Yes Yes
Industry F.E. Yes Yes Yes Yes
No. of observations 9,892 9,892 9,892 9,892
R2 29.30% 29.30% 27.40% 27.50%
(continued)
Panel B: Lead-lag specification
Lagged CSR 0.001** (2.13) 0.003*** (3.92)
Lagged average CSR 0.002** (2.07) 0.004*** (3.62)
Cash ETR 0.187*** (18.63) 0.186*** (15.40)
GAAP ETR 0.201*** (8.17) 0.203*** (8.77)
Controls Yes Yes Yes Yes
Year fixed Effect Yes Yes Yes Yes
Industry fixed effect Yes Yes Yes Yes
No. of obs. 14,407 8,322 14,407 8,322
R2 25.50% 30.20% 23.80% 28.20%
Panel C: First difference specification
4Cash ETR volatility 4GAAP ETR volatility
4Average CSR 0.003* (1.71) 0.003** (2.11)
4Cash ETR 0.130*** (12.54)
4GAAP ETR 0.084*** (5.93)
4Average size 0.01 (0.71) 0.004 (0.39)
4Average PPE 0.117** (2.10) 0.167*** (3.32)
4Average 4PPE 0.016 (0.23) 0.079 (1.30)
4Average leverage 0.046 (1.48) 0.065** (2.35)
4Average intangibles 0.022 (0.71) 0.034 (0.86)
4Average R&D expense 0.399*** (4.67) 0.352*** (2.90)
4Average NOL dummy 0.002 (0.26) 0.004 (0.65)
4Average 4NOL 0.000 (1.26) 0.000 (0.71)
4Average extraordinary items 0.475*** (3.52) 0.087 (1.06)
4Average foreign income 0.000 (0.60) 0.001* (1.92)
4Average foreign income dummy 0.020 (1.28) 0.015 (1.44)
4Average ROA 0.171*** (4.35) 0.279*** (6.40)
4Average MB 0.000 (0.04) 0.000 (0.83)
4Average sales growth 0.000*** (10.21) 0.000*** (5.94)
4Average institutional ownership 0.000*** (7.60) 0.000** (2.40)
Coef. 0.001 (0.66) 0.000 (0.35)
(continued)

Table VII.
social

1119
Corporate

responsibility
 34,9
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1120

Table VII.
Year F.E. Yes Yes
Industry F.E. Yes Yes
No. of obs. 8,276 8,276
R2 14.10% 5.40%

Notes: This table presents the results of additional tests for Hypothesis I. Panel A reports the result with additional control variables, Panel B presents the result
of placebo test, Panel C shows the lead-lag specification, Panel D reports the first difference specification. All the tables use cash ETR volatility and GAAP ETR
volatility as dependent variables and CSR and average CSR as independent variables. All of the other variables are defined in Appendix 2. Coefficients are
presented with firm- and year-clustered standard errors in parenthesis. ***, ** and * denote significance at a 1, 5 and 10 per cent level for two-tailed tests.
Next, the unrecognized tax benefit (UTB) from FIN 48 was used to measure tax Corporate
uncertainty to corroborate the findings regarding the primary research question. An social
advantage of this method was that FIN 48 was expected to have a beneficial effect on
responsibility
tax planning (Mills et al., 2010); however, it was unlikely to have an effect on socially
responsible donations. The UTB level is considered a reliable measure of tax
uncertainty. Hoi et al. (2013) asserted that corporations involved in irresponsible CSR
activities before the adoption of FIN 48 would have a higher UTB after its 1121
implementation. Accordingly, the UTB variable was developed as the natural
logarithm of the beginning balance of UTB for 2007. Column 1 of Table VII shows that
the firms that were engaged in more socially responsible activities had a lower level of
UTB and a less uncertain tax position at the implementation of FIN 48.
The dummy variable decrease was constructed. Its value was 1 if the ending balance of
the 2009 UTB was no more than the 2007 UTB balance for the year 2007[7]; it was 0
otherwise. A logistic regression was run when the dependent variable was decrease. Column
2 of Table VII shows that the coefficient of CSR was significantly negative at 5 per cent.
Thus, these results suggest that the firms engaging in more socially responsible activities
prior to the implementation of FIN 48 were more likely to reduce the overall UTB balance
after FIN 48.

UTB Decrease Settlement

OLS Logit Tobit

CSR 0.044* (1.94) 0.070** (2.00) 0.015* (1.80)

Size 0.719*** (16.20) 0.026 (0.39) 0.106*** (6.14)
PPE 0.299 (0.77) 0.735 (1.26) 0.118 (0.75)
4PPE 0.602 (0.78) 0.512 (0.41) 0.209 (0.60)
Leverage 0.469* (1.81) 0.296 (0.64) 0.135 (1.12)
Intangibles 0.659** (2.03) 0.037 (0.07) 0.117 (0.90)
R&D expense 1.844* (1.92) 3.540* (1.94) 1.301*** (2.61)
NOL dummy 0.063 (0.59) 0.064 (0.40) 0.03 (0.72)
4NOL 0.000 (1.15) 0.000 (1.41) 0.000 (0.21)
Extraordinary items 0.681 (0.33) 2.392 (0.67) 1.173 (1.20)
Foreign income 0.029 (0.53) 0.09 (1.23) 0.011 (0.54)
Foreign income dummy 0.422*** (3.21) 0.609*** (3.00) 0.152*** (2.87)
ROA 0.205 (0.46) 0.454 (0.65) 0.019 (0.10)
MB 0.000 (0.00) 0.001 (0.43) 0.000 (0.12)
Sales growth 0.405* (1.82) 0.858** (2.00) 0.246** (2.24)
Firm age 0.074 (0.75) 0.049 (0.33) 0.014 (0.36)
Institutionalo 0.002 (0.57) 0.002 (0.31) 0.002 (1.58)
Year F.E. No Yes No
Industry F.E. Yes Yes Yes
1,090 1,077 1,090
Adjusted R2/Pseudo R2 31.69% 7.26% 11.08%

Notes: This table presents the relation between CSR and uncertain tax position. In Column (1), the
dependent variable is the natural logarithm of the beginning UTB balance at the onset of FIN 48 in year
2007. In Column (2), the dependent variable is decrease, a dummy variable equals 1 if ending UTB balance
in 2009 minus beginning UTB balance in 2007 is less than 0, and 0 otherwise. In Column (3), the dependent
variable is Settlement, the sum of all settlements with tax authorities over the period 2007-2009 divided by
beginning UTB balance for year 2007. Industry dummies are included in each specification. All of the other Table VIII.
variables are defined in Appendix 2. Coefficients are presented in parenthesis. ***, ** and * denote CSR and uncertain
significance at a 1, 5 and 10 per cent level for two-tailed tests tax position
MAJ Variable Treated Controls Difference S.E. T-stat
34,9
Cash ETR volatility 0.1592 0.1464 0.0128 0.0030 4.24
CSR 1.2147 1.6827 2.8974 0.0443 65.41
Cash ETR 0.4306 0.4067 0.0239 0.0071 3.37
Size 7.1199 7.1090 0.0109 0.0328 0.33
PPE 0.2821 0.2780 0.0041 0.0049 0.83
1122 4PPE 0.0191 0.0196 0.0005 0.0015 0.31
Leverage 0.1953 0.2009 0.0056 0.0046 1.21
Intangibles 0.1738 0.1766 0.0027 0.0042 0.65
R&D expense 0.0376 0.0386 0.0010 0.0017 0.57
NOL dummy 0.4598 0.4570 0.0028 0.0112 0.25
4NOL 150.7522 134.1602 16.5921 12.2418 1.36
Extraordinary items 0.0001 0.0001 0.0000 0.0004 0.03
Foreign income 0.5104 0.5479 0.0375 0.0793 0.47
Foreign income dummy 0.5834 0.5830 0.0004 0.0109 0.04
ROA 0.0566 0.0591 0.0026 0.0032 0.79
MB 3.5930 4.0208 0.4278 1.0279 0.42
Table IX. Sales growth 0.1311 0.1102 0.0209 0.0160 1.31
Propensity score Firm age 3.0743 3.0615 0.0129 0.0140 0.92
matching Institutional ownership 23.1002 23.3130 0.2128 0.9093 0.23

To gain a general understanding of how a corporation settles its UTB with the tax
authorities, the variable settlement was constructed. It was equal to the sum of all
settlements with tax authorities during 2007-2009 divided by the beginning UTB
balance in 2007. The coefficient of CSR on settlement indicated that the firms that were
more socially responsible increased their ability to settle their initial uncertain tax
positions.
The propensity-matching technique, as used by Shipman et al. (2016), was also applied to
determine the possibility of significant differences in tax risk for firms with more and those
with less CSR. The findings were the same. The propensity to engage in risky tax planning
was higher among firms with lower levels of CSR than those with higher levels (Table VIII).
The mean of cash ETR volatility in the treatment group (firms with more CSR) was 0.1592.
For those in the matched sample (firms with less CSR), the mean was 0.1464. The difference
was significant at the 1 per cent level. This comparison also shows that the other firm-level
variables were generally similar.

Conclusion
This paper represents a major advance in the understanding of the link between CSR and
tax risk. Using the volatility of the ETR, this study provides evidence that engaging in
social responsibility allows for better control of tax risk. This result was robust for the
alternative measures of CSR and tax risk, the different specification of the regression
model, the additional control variables and propensity score matching. The
understanding of this association contributed to the conclusion that tax savings do not
necessarily increase tax risk. The consideration of tax risk enables the use of the ETR to
measure tax aggressiveness.
The findings of the current study are consistent with those of Davis et al. (2015):
involvement in CSR activities led to tax savings. It also supports the view that CSR could be
regarded as one dimension of a corporate culture that influences corporate tax strategies. Corporate
This study focused on the link between CSR and tax risk. It has documented a pattern. social
Firms that promote responsible CSR activities could benefit from increased savings on taxes
and reduced tax uncertainty, and those that promote irresponsible CSR activities could have
responsibility
a higher tax risk. The present study also notes that firms with poor performance could lose
the ethical benefits of CSR. This suggests that the ethical benefits of CSR are related to firm
performance. This finding complements the mixed results on the link between CSR and tax
aggressiveness.
1123
Most of the previous studies related to tax aggressiveness have not focused on the
importance of tax risk. Accounting scholars need to explore this area to a greater extent
because tax strategy or tax aggressiveness, is an interesting and important topic for
academics and practitioners. This study contributes to this line of research by
simultaneously considering tax risk and the ETR. The empirical results support the
hypothesis that responsible CSR activities would allow firms to enjoy greater tax savings
with lower tax risk.

Notes
1. Tax aggressiveness is the continuum of tax planning strategies that results in the reduction of
explicit tax burden.
2. MSCI, formerly the KLD database, obtain its information from surveys, financial
statements, and articles found in the popular press and academic journals. It assigned
“one point” for each strength or concern, under seven categories: environment,
community, product, employee relations, diversity, corporate governance and human
rights. The KLD rating was based on the presence of certain concerns or strengths for
each measure.
3. Social performance includes corporate governance, community, diversity, employee relations,
environment, product and exclusionary screen categories, including alcohol, gambling, military
contracting, nuclear power and tobacco.
4. The CSR index ranged from 9 to 17. However, there are only 2, 1, 2 and 3 observations for CSR
in 9, 8, 17 and 16, respectively. To visualize our figure, we combine 9 and 8 into the group
of 7, and combine 17 and 16 into the group of 15.
5. Community, diversity, employee relations, environment, humanity, corporate governance and
product
6. To avoid the lack of observed changes in CSR, we used the change of average CSR rather change
of CSR in the first difference specification.
7. FIN 48 is at the onset in the year 2007.

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Appendix 1
Appendix 1 reports detailed information and the definitions of 75 social ratings, which is provided by
KLD Research & Analytics, Inc. (2008). As an independent rating agency, KLD expanded its
coverage since 2003. Any changes and new items added after 2003 are shown in parentheses.

Table AI.
disclosure items
Category of CSR
Category Responsible CSR activities (positive social rating)
Corporate governance Limited compensation (1991 to 2009)
Ownership strength (1991 to 2009)
Reporting quality (from 1996 - 2012)
Political accountability strength (2005 to 2009)
Public policy strength (from 2007 through 2011)
Corruption and political instability
Financial system instability
Total number of corporate-governance strengths (1991 to 2013)
Other strengths (1991 to 2009)
Community Charitable giving (from 1991 through 2011)
Innovative giving (from 1991)
Support for housing (1991 to 2009)
Support for education (1994 to 2009)
Non-US charitable giving (1994 to 2009)
Volunteer programs (2005 to 2009)
Community engagement (from 2010)
Total number of community strengths (1991 to 2013)
Other strengths 1991 to 2011)
Diversity CEO (1991 to 2009)
Promotion (1991 to 2011)
Board of directors - gender (from 1991)
Work-life benefits (1991to 2011)
Women and minority contracting (from 1991)
Employment of the disabled (1991 to 2009)
Gay and lesbian policies (1995 to 2011)
Employment of underrepresented groups (from 2010)
Total number of diversity strengths (1991 to 2013)
Other strengths (from 1991)
Employee Union relations (from 1991)
No-layoff policy (1991 to 1993)
Cash profit sharing (from 1991)
34,9
MAJ
1126
Irresponsible CSR activities (negative social rating)
High compensation (1991 to 2009)
Ownership concern (1991 to 2009)
Accounting concern (2005 to 2009)
Reporting quality (from 1996 - 2012)
Political Accountability Concern (2005 to 2007)
Public policy concern (2007 to 2011)
Governance structures (from 2010)
Controversial investments
Business ethics
Total number of corporate governance concerns (1991
to 2013)
Other concerns (from 1992)
Investment controversies (1991 to 2009)
Community impact (from 1991)
Tax disputes (1991 to 2009)
Total number of community concerns (1991 to 2013)
Other concerns (1991 to 2009)
Workforce Diversity (from 1991)
Non-Representation (from 1993 through 2011)
Board of directors - gender (from 1991)
Board of directors - minorities (from 1991)
Total number of diversity concerns (1991 to 2013)
Other Concerns (1991 to 2009)
Union Relations (from 1991)
Employee Health and Safety (from 1991)
Workforce Reductions (1991 to 2009)
(continued)
Category Responsible CSR activities (positive social rating) Irresponsible CSR activities (negative social rating)

Employee involvement (from 1991) Retirement Benefits Concern (1992 to 2009)

Retirement benefits strength (1991 to 2009) Supply Chain (from 1998)
Employee health and safety (from 2003) Child Labour
Supply chain labour standards (from 2002) Total Number of Employee Relations Concerns (1991
to 2013)
Compensation and benefits Labour-Management Relations
Employee relations
Professional development
Human capital management
Controversial sourcing (from 2013)
Total number of employee relations strengths (1991 to 2013)
Emp. relations other strengths (1991 to 2011)
Environment Environmental opportunities (from 1991) Hazardous Waste (1991 to 2009)
Waste management (from 1991) Regulatory Compliance (from 1991)
Packaging materials and waste (from 1991) Ozone Depleting Chemicals (1991 to 2009)
Climate change (from 1991) Toxic Spills and Releases (from 1991)
Property, plant, equipment (1991 to 1995) Agriculture Chemicals (1991 to 2009)
Environmental management systems (from 2006) Climate Change (from 1999)
Water stress Impact of Products and Services (from 2010)
Biodiversity and land use Biodiversity and Land Use (from 2010)
Saw materials sourcing Operational Waste (from 2010)
Natural resource use (from 2013) Supply Chain Management
Environmental opportunities - green buildings (from 2013) Water Management
Environmental opportunities in renewable energy (from 2013) Total Number of Environment Concerns (1991 to 2013)
Waste management - electronic waste (from 2013) Other Concerns (from 1991)
Total number of environment strengths (1991 to 2013)
Climate change - energy efficiency (from 2013)
Climate change - product carbon footprint (from 2013)
(continued)

Table AI.
social

1127
Corporate

responsibility
 34,9
MAJ

1128

Table AI.
Category Responsible CSR activities (positive social rating) Irresponsible CSR activities (negative social rating)

Climate change - insuring climate change risk (from 2013)

Other strengths (from 1991)
Human Right Positive record in S. Africa (1994 to 1995) South Africa (1991 to 1994)
Indigenous people’s relations strengths (from 2000) Northern Ireland (1991 to 1994)
Labor rights strength (2002 to 2009) Support for controversial regimes (from 1994)
Total number of human rights strengths (1991 to 2013) Mexico (1994 to 2001)
Human rights policies and initiatives (from 1994) Labour-rights concern (1998 to 2009)
Indigenous-peoples-relations concerns (2000 to 2009)
Operations in Sudan (from 2010 to 2011)
Freedom of expression and censorship
Human rights violations
Total number of human rights concerns (1991 to 2013)
Other concerns (from 1994)
Product Quality (from 1991) Product Quality and Safety (from 1991)
R þ D, Innovation (1991 to 2009) Marketing and Advertising (from 1991)
Social Opportunities (from 1991) Anticompetitive Practices (from 1991)
Access to Finance (from 1991) Customer Relations
Social Opportunities - Access to Communications (From 2013) Privacy and Data Security (From 2015)
Social Opportunities - Opportunities in Nutrition and Health (From 2013) Total Number of Product Concerns (1991 to 2013)
Product Safety - Chemical Safety (From 2013) Other Concerns (from 1991)
Product Safety - Financial Product Safety (From 2013)
Product Safety - Privacy and Data Security (From 2013)
Product Safety - Responsible Investment (From 2013)
Product Safety - Insuring Health and Demographic Risk (From 2013)
Total Number of Product Strengths (1991 to 2013)
Other Strengths (1991 to 2009)
Appendix 2 Corporate
social
responsibility
Dependent variables

Cash ETR volatility Standard deviation of Cash ETR, measured over the period t-4 to t, where,
Cash ETR is cash ETR, defined as the tax paid in cash (TXPD) divided by the
pre-tax book income (PI) before special items (SPI) 1129
GAAP ETR volatility Standard deviation of GAAP ETR measured over the period t-4 to t, where,
GAAP ETR is financial accounting ETR, defined as the total income tax
expense (TXT) divided by the pre-tax book income (PI) before special items
(SPI)
Corporate social responsibility (CSR) variables
CSR Total strengths minus total concerns in the MSCI ESG five social rating
categories: community, diversity, employee relations, environment, and
product; In the robustness test, alternative measure of CSR also use the CSR
index covered all seven categories: corporate governance, employee relations,
environment, community, diversity, human rights, product quality and safety
Strength Total strengths in the MSCI ESG five social rating categories: community,
diversity, employee relations, environment and product
Concern Total Concerns in the MSCI ESG five social rating categories: community,
diversity, employee relations, environment and product
Mechanism and control variables
ROA dummy The dummy variable equals one if the net income (NI) scaled by total assets
(AT) of the observation is above the median level, otherwise zero
Cash flow dummy The dummy variable equals one if the observation’s cash flow (OANCF)
scaled by total assets (AT) is above the median level, otherwise zero
Earnings exceed analyst The dummy variable equals one if the difference between earnings and
forecast dummy analysts’ forecast earnings is higher than the median level, otherwise zero
Firm size Natural log of total assets (AT)
PPE Gross property, plant and equipment (PPEGT) divided by total assets (AT)
4PPE Change in gross property, plant and equipment (PPEGT) divided by total
assets (AT)
Leverage Long-term debt (DLTT) plus short-term debt (DLC) scaled by total assets
(AT)
Intangible asset Intangible assets (INTAN) divided by total assets (AT)
R&D expense Research and development expense (XRD) divided by net sales (SALE)
NOL Net operating loss carryforward (TLCF) divided by total assets (AT)
NOL dummy The dummy variable equals one if the observation has a net operating loss
carryforward (TLCF), otherwise zero
Extraordinary item Extraordinary items (XIDO) divided by total asset (AT)
Foreign income Absolute value of pretax foreign income (PIFO) divided by the absolute value
of total pretax income (PI)
Foreign income dummy The dummy variable equals one if pretax foreign income (PIFO) is nonzero;
zero otherwise
ROA Return on assets: Pre-tax book income scaled (PI) by total assets (AT)
MB ratio Price per share (PRCC_F) times total common shares outstanding (CSHO)
over book value of equity (CEQ) Table AII.
(continued) Variable definitions
MAJ
34,9 Dependent variables

Sales growth The annual percentage change in net sales (SALE)

Firm age The natural logarithm of number of years since first year on Compustat
database
Institutional ownership Number of shares held by institutional investors scaled by total shares
1130 outstanding
Sales volatility Standard deviation of sales over five-year period ending in year t, scaled by
mean total assets over the same period
Sales growth volatility Standard deviation of sales growth over five-year period ending in year t,
scaled by mean total assets over the same period
Cash flow volatility Standard deviation of operating cash flow over five-year period ending in
year t, scaled by mean total assets over the same period
Cash Cash and cash equivalents (CHE) divided by total assets (AT)
Governance Total strengths minus total concerns in the MSCI ESG “governance” category
Tax benefit Tax benefit of stock options (TXBCOF) divided by lagged total assets (AT)
SGA expense Selling, general, and administrative expense (XSGA) divided by net sales
Table AII. Employee No The natural logarithm of employee number (EMP)

Corresponding author
Ming Liu can be contacted at: morrisliu@um.edu.mo

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