Received: 10 February 2020 Revised: 5 November 2020 Accepted: 19 November 2020

DOI: 10.1002/csr.2098

RESEARCH ARTICLE

Giving too much and paying too little? The effect of corporate
social responsibility on corporate lobbying efficacy: Evidence
of tax aggressiveness

Woon Leong Lin

Faculty of Economics and Administration,

University of Malaya, kuala Lumpur, Malaysia
Correspondence
Lin Woon Leong, Faculty of Economics and
Administration, University of Malaya, Kuala
Lumpur, Malaysia.
Email: linwoonleong@gmail.com
Abstract
Though lobbying accounts for a significant proportion of corporate political expendi-
ture, comprehensive research on its advantages is scarce. Further, research findings
have been inconclusive in quantifying political lobbying expenditures' rate of return.
Using data from Fortune's America's Most Admired Companies (AMAC) with publicly
available financial statements for the period from 2008 to 2017, this study delved
into the tax benefits of lobbying using the dynamic panel system GMM and quantile
regression model. This study found strong evidence that corporate lobbying is associ-
ated with higher levels of tax aggressiveness. The results also show that firms that
spend more on lobbying in a given year pay lower effective tax rates. Additionally,
this study revealed that the reputational effects of corporate social responsibility lead
to the increased effectiveness of corporate lobbying expenditures. Thus, political lob-
bying affects tax enforcement, resulting in lower tax burdens for politically active
firms. These results are consistent with the conjecture that firms with high levels of
social responsibility and political lobbying are more tax aggressive. This study has
addressed the need to quantify the benefits of lobbying and corporate social respon-
sibility activities, especially in terms of lower tax payments and better financial
returns to shareholders while still meeting the needs of non-owner stakeholders.

KEYWORDS

corporate financial performance, corporate lobbying, dynamic panel quantile regression,

Fortune's America's Most admired company, system GMM

1 | I N T RO DU CT I O N
The last decade has seen the exponential growth of the lobbying
industry around the world. Popular press reports state that money
does not just buy influence and political access but also affects buying
outcomes (Richter, Samphantharak, & Timmons, 2009). Sorauf (1994)
observed that academic inquiry has rejected the argument that corpo-
rate campaign contributions yield organizational benefits. However,
campaign contributions are not the only form of corporate political
money involved, as the amount of money spent for lobbying purposes
is substantially high (Kim & Zhang, 2016; Richter et al., 2009). Many
empirical studies have shown that politically aligned firms are tax
aggressive as they enjoy low detection risk, high risk-taking tendency,
less corporate pressure for transparency, lower political costs associ-
ated with aggressive tax planning, and more information on future
changes in tax regulation and enforcement (Barrick & Brown, 2016;
Chen, Dyreng, & Li, 2015; Faccio, 2016; Martinez, 2017). Neverthe-
less, research on lobbying has neglected to investigate the issue of tax
aggressiveness. Furthermore, there are limited systematic cross-
industry reports investigating whether individual organizations derive
any benefits from their lobbying activities. In this article, the
researcher attempted to address this gap by determining (i) the effect

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of corporate lobbying on tax aggressiveness and (ii) the effect of cor-
porate social responsibility (CSR) on lobbying efficacy.
Andreoni, Erard, and Feinstein (1988) adopted a policy viewpoint
to state that the topic of corporate tax aggressiveness is not new but
highly significant for all countries, given that it is related to the active
avoidance of taxes. Tax aggressiveness was described by Bird and
Davis-Nozemack (2018) as the various structures and transactions
that potentially decrease tax responsibilities, contrary to the inten-
tions and policies of government legislations. Furthermore, Hanlon
and Heitzman (2010) regard tax avoidance as regular tax planning pol-
icies which include low-risk and legal strategies on one hand and tax-
sheltering and tax-evading strategies on the other. Tax aggressiveness
thus helps corporate organizations derive the benefits of corporate
citizenship without bearing any costs, since the latter are then trans-
ferred to different parties (Whait, Christ, Ortas, & Burritt, 2018). In
fact, global corporate culture has assimilated the development of
aggressive managerial activities to decrease corporate taxes. In gen-
eral, tax aggressiveness could offer several benefits, but may also
prove to be costly.
In the US, tax avoidance is well known to federal lawmakers. A
report from the Institute of Taxation and Economic Policy (ITEP) dis-
covered that in 2018, 60 of America's biggest corporations circum-
vented federal income taxes for US$79 billion dollars of pre-tax
income. Instead of paying US$16.4 billion in taxes at the 21% statu-
tory corporate tax rate, these companies enjoyed a net corporate tax
rebate of US$4.3 billion. ITEP's report also indicated that the compa-
nies that avoided income tax in 2018 were from multiple sectors in
the US economy. Computer maker IBM made US$500 million and
received a federal income tax rebate of US$342 million; retail giant
Amazon reported US$11 billion in income and claimed a federal
income tax rebate of US$129 million; streaming service Netflix paid
no federal income tax on US$856 million of income; beer maker
Molson Coors earned US$1.3 billion and received a federal income
tax rebate of US$22.9 million; and automobile maker General Motors
reported a negative tax rate on US$4.3 billion of income.
This research was motivated by four factors. First, Figure 1 indi-
cates that lobbying is a major business in the USA. In the 29-year
period between 1998 and 2018, registered lobbying expenses
increased to US$3.46 billion from US$1.45 billion, accounting for
4 16000
3.5 14000
3 12000
2.5 10000
2 8000
1.5 6000
1 4000
0.5 2000
0 0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total Lobbying Spending Total Lobbyists
F I G U R E 1 Aggregate lobbying Trends between 1998 and 2018
[Colour figure can be viewed at wileyonlinelibrary.com]
about 85% of the period's special interest-related registered political
expenses. Though firms aim for different political benefits, all of them
care about taxes, since lower taxes significantly increase net profits.
Therefore, firms consider tax issues as their topmost lobbying priority.
Hired lobbyists believe that lobbying related to tax policies is the
“World Series” of lobbying (The Hill, 2004). Brown, Drake, and
Wellman (2015) attributed cash effective tax rates (ETRs) to political
access (i.e., number of candidates supported by political action com-
mittee [PAC] contributions) and influence (number of tax lobbying
reports filed) from the differential effects of lobbying and campaign
contributions. They further stated that campaign contributions signifi-
cantly influence policies via lobbying.
Second, numerous studies have determined the influence of lob-
bying on tax aggressiveness, arguing that firms lobby to acquire or
maintain tax breaks, which further decreases tax rates. For instance,
Richter et al. (2009) noted that firms that spend more on lobbying
activities in a specific year pay a lower ETR the following year. In their
report, Meade and Li (2015) found that firms that engage in aggres-
sive lobbying rather than defensive lobbying show a negative relation-
ship between future tax rates and tax lobbying expenses. Conversely,
Drope and Hansen (2008) observed that firms that spend more on
influencing general policies (especially tax-related policies) are not
likely to derive additional benefits from lower tax rates. Meanwhile,
according to Brown et al. (2015), campaign contributions increase the
efficiency of lobbying in decreasing ETRs. Thus, the evidence suggests
mixed results on firms' ETR and lobbying activities.
The third factor that motivated this study is the inconclusive
results presented by earlier studies due to the limitations of condi-
tional mean regression models such as Ordinary Least Squares and
Fixed Effects. This study determined that the effect of corporate lob-
bying on tax aggressiveness requires further investigation. Thus, this
study proposed a novel dynamic panel quantile regression model to
bridge the gap in the literature. Conditional mean regression models
provide estimates based on the average effect of the independent
variable on the average firm. Alternatively, this study posit that the
estimation of dynamic panel models via quantile regression is pre-
ferred because of its two main advantages: (i) quantile results are
robust to outliers (Buchinsky, 1995) and (ii) quantile regression can
describe the entire conditional distribution of the dependent variable
(see Koenker & Bassett, 1978; Koenker & Hallock, 2001).
Fourth, this study addressed the logical question, “What makes
lobbying effective?” (Mathur & Singh, 2011). Hansen (2011)
suggested that the success of lobbyists is based on their ability to con-
vey relevant information to their target audience. Their credibility
plays a vital role in this transfer of information. When Wise (2007)
interviewed various lobbyists, 22 of them stated that relationships are
important for effective lobbying. They further asserted that honesty,
ethics, and integrity are necessary to maintain positive relationships.
Furthermore, lobbyists noted that sustained investments in access are
related to lower ETRs. Consequently, Lanis and Richardson (2012,
2015) opined that corporate social responsibility (CSR) principles
potentially affect tax aggressiveness. Indeed, researchers have
observed that CSR affects tax aggressiveness with regards to how
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corporations account for and direct all their systems and processes to
benefit the overall society (Avi-Yonah, Clausing, & Durst, 2008;
Desai & Dharmapala, 2006). In this study, the researcher explored this
issue by considering CSR as a moderating factor that acts as a bound-
ary condition for the correlation between tax aggressiveness and cor-
porate lobbying (Lanis & Richardson, 2012, 2015; Richardson,
Taylor, & Lanis, 2016).
This study used a sample of 162 America's Most Admired Compa-
nies (AMAC) listed in the Fortune list between 2008 and 2017. This
study examined how corporate lobbying (measured through total lob-
bying expenses) relates to corporate tax aggressiveness (proxied by
ETR). The results indicated a negative relationship between corporate
lobbying and firms' tax aggressiveness. Furthermore, CSR perfor-
mance showed a negative moderating effect on the relationship
between corporate lobbying and tax aggressiveness. These results
suggest that firms engaged in CSR activities also consider their tax
evasion stance. This confirms the notion that CSR is a core activity
used by corporations to support their tax positions. The quantile
regression estimates were similar to earlier studies which showed that
the effect of corporate lobbying is stronger for firms with a higher
ETR, implying that profitable Fortune AMACs have manipulated the
tax system to avoid paying tax on billions of dollars in profits.
This study contributes to the literature in three ways. First, it pre-
sents empirical evidence that politically lobbied organizations have a
higher likelihood of engaging in tax aggressiveness. Second, it used a
comprehensive measurement of CSR activities to reveal CSR's moder-
ating effect on the corporate lobbying–tax aggressiveness link. The
negative relationship between these factors is consistent with the fact
that politically lobbied corporations with high CSR performance are
more likely to participate in corporate tax aggressiveness. Third, previ-
ous studies generally used the traditional conditional mean regression
method, which estimates the linear relationship between the depen-
dent and exogenous variables. This technique prevents analysis of a
case wherein the regression parameters are heterogeneously distrib-
uted among the dependent variables. To overcome this limitation, this
study used a novel statistical method, that is, quantile regression
(Koenker & Bassett, 1978), which describes the effect of exogenous
variables and assesses the distribution of different variables across
the quantiles of liquidity creation. This presented a clear picture of the
relationship between tax aggressiveness and corporate lobbying.
This paper is organized as follows: Section 2 reviews the related
theories and hypotheses; Section 3 describes the research design;
Section 4 reports and analyzes the empirical results; and Section 5
presents the study's conclusions.
2 | LITERATURE REVIEW AND
HYPOTHESIS DEVELOPMENT
2.1 | Corporate lobbying
Many corporations engage in political activities to influence legislators
at different governmental levels; this is known as corporate lobbying
3
(Hadani, Bonardi, & Dahan, 2017). It has been actively practised and
protected in the US under the Constitution's “freedom of speech”
law. Controlled by the Lobbying Disclosure Act of 1995, corporate
lobbying is described as any information regarding the modification,
formulation, and adoption of legislation that is communicated by cli-
ents to members of the Congress, the President, congressional
staffers, White House staff, and high-level employees of about
200 agencies (The Centre for Public Integrity). Corporate lobbying is
helpful as it provides the central government with important informa-
tion from the different individuals and interest groups who are
affected by existing and upcoming legislative activities (den Hond,
Rehbein, de Bakker, & Lankveld, 2014; Lock & Seele, 2017). This
information helps governmental agencies make better and more
informed decisions. However, interest groups can also use lobbying to
manipulate the policy formation process and its benefits in their favor
(Chen, Dyreng, & Li, 2015). In fact, some groups who spend a lot of
money on lobbying include corporations involved in controversies,
scandals, and lawsuits like WorldCom, Enron, Phillip Morris, and
Halliburton. Such corporations may engage in corporate lobbying for
various reasons like to manage firm perspectives, to influence the
competitive environment, to increase governmental sales, to avoid
taxes, and because they belong to regulated industries (Aggarwal,
Meschke, & Wang, 2012; Hillman, Keim, & Schuler, 2004).
2.2 | Corporate lobbying and tax aggressiveness
The literature on the political economy shows that corporate lobbying
is a valuable resource to individual firms (e.g., Faccio, Masulis, &
Mcconnell, 2006; Fisman, 2001; Goldman, Rocholl, & So, 2009; Kim &
Zhang, 2016). Some recent studies have highlighted the myriad ways
in which corporate lobbying adds value, such as through better alloca-
tion of governmental contracts, preferential access to bank finances,
and government capital investments (Chen, Dyreng, & Li, 2015;
Claessens, Feijen, & Laeven, 2008; Duchin & Sosyura, 2012; Unsal,
Hassan, & Zirek, 2016). Other reports contradict these findings,
claiming that corporate political activity is ineffective or even harmful
to financial and political outcomes (Aggarwal et al., 2012;
Ansolabehere, de Figueiredo, & Snyder, 2003). Overall, extant
research has described the effect of lobbying expenses in general
terms rather than on a particular aspect of tax legislation. Although
taxes are a prevalent issue addressed by lobbyists, few researchers
have investigated the outcomes of tax lobbying.
Alexander, Scholz, and Mazza (2009a) mentioned that it is diffi-
cult to determine the returns from lobbying expenses and to link lob-
bying expenses to specific legislative policies. Consequently, limited
relevant results have been established in earlier studies. To address
these issues, this study investigated lobbying in terms of a specific
activity. The American Jobs Creation Act of 2004 was established to
offer tax saving schemes to American organizations that repatriate
their incomes from foreign subsidiaries. It was noted that the corpora-
tions that lobbied for this legislation received tax savings amounting
to US$62.5 billion on US$208 billion of repatriated foreign income.
4 LIN
They had spent US$282.7 million for lobbying purposes, suggesting a
return of 22%. Richter et al. (2009) conducted one of the first studies
on the relationship between lobbying expenses and corporations'
ETRs. They found that an increase in lobbying expenditure signifi-
cantly decreases firms' ETR, supporting the notion that corporations
can successfully lobby for laws and regulations that help them
decrease their tax costs. Similar results were revealed by Hill, Kubick,
Brandon Lockhart, and Wan (2013), who used book ETRs and differ-
ences in discretionary permanent book taxes to measure the avoid-
ance of tax payments, which represented firms' engagement in tax
lobbying.
Corporate lobbying can potentially decrease the political costs of
being tax aggressive. Mills, Nutter, and Schwab (2013) stated that US
companies that depend more on government contracts pay more
taxes; as such, they suffer the cost of losing contract work when they
are tax aggressive. However, Goldman, Rocholl, and So (2013) argued
that corporate lobbying can improve the value of US firms' procure-
ment contracts, such that connected firms worry less about losing
government contracts. Hence, politically connected firms can afford
more aggressive tax planning because their connections alleviate the
political cost concerns of being tax aggressive. Based on this discus-
sion, this study proposed the following hypothesis:
Hypothesis 1. (H1): Political lobbying firms exhibit a higher degree of
tax aggressiveness compared to non-lobbying firms.
2.3 | Corporate social responsibility
CSR has various rationales, one of which is “any organization needs to
consider the effect of its operations on the environment and society,
thereby maximizing benefits and minimizing issues” (UK Government,
2004). It is defined as a constant commitment made by businesses to
behave ethically and to contribute to economic development while also
improving the life quality of workers, their families, the local commu-
nity, and the general society (Holme & Watts, 2000). CSR is regarded as
an important factor that is responsible for the survival and success of
any firm. Though corporations engage in CSR activities for many rea-
sons, Watts and Zimmerman (1990) applied the agency theory to the
field of accounting and stated that CSR is an illegitimate attempt by
managers to tax shareholders without their consent and evade account-
ability for their activities. This perspective could explain why scarcely
any accounting studies have determined the effect of firms' CSR activi-
ties on corporate tax policies despite the agency theory being highly rel-
evant in accounting research (Avi-Yonah et al., 2008; Desai &
Dharmapala, 2006).
2.4 | The role of CSR in corporate lobbying and tax
aggressiveness
Socially-responsible firms also possess political capital, which
increases their ability to contact and persuade policymakers through
their lobbying activities (den Hond et al., 2014). Many companies use
non-marketing CSR strategies to signify to their shareholders that
they donate a portion of their profits to a specific social cause
(e.g., environmental protection, cancer research, etc.) (Wickert, 2016).
Thus, the customer develops a positive feeling for CSR-practising
firms, leading to a meaningful relationship between the customer and
the corporation. Hence, customers exhibit loyalty towards the com-
pany and ignore any negative information regarding the company and
its operations.
With regards to lobbying, socially responsible organizations are
more favored by policymakers compared to those that are not. Thus,
policymakers recognize these corporations and are likely to allow their
lobbying positions. However, limited research exists on CSR and cor-
porate lobbying parameters. Regarding them as non-market strategies
used to increase firm value, Richter (2011) investigated whether CSR
and lobbying complement or substitute one another. The study noted
that firms at lower and higher ends of the CSR spectrum are more
likely to engage in lobbying activities than firms in the middle. Rich-
ter (2011) further observed a significant positive coefficient for the
interaction between lobbying and CSR, confirming a complementary
relationship. However, in the within-firms (using firm fixed effects), a
negative coefficient was noted between lobbying and CSR, whereby
their existing positive relationship was attributed to the unmeasured
“good management” characteristics of the firms that engaged in
higher lobbying or CSR activities. This indicates that these companies
have to pay a price. Based on this relationship and the existence of
tax-related lobbying, this study investigated the effect of the interac-
tion between CSR and lobbying activities on beneficial outcomes
proxied by ETR. Earlier studies by Alexander, Scholz, and
Mazza (2009b), Farber, Johnson, and Petroni (2007), and Richter
et al. (2009) showed that higher lobbying increases tax benefits. Posit-
ing that this relationship may be improved by social responsibility, this
study proposed the following hypothesis.
Hypothesis H2. (H2): CSR moderates the relationship between cor-
porate lobbying expenses by a firm and tax aggressiveness.
Highly sociable responsible firms were more effective at
engaging in lobbying activities for reducing their effective tax
rates than the less socially responsible firms.
3 | DA T A A N D M E T H O D O L O G Y
3.1 | Conditional mean regression—System GMM
This study employed the System Generalized Method of Moments
(System GMM) panel estimator, initially described by Holtz-Eakin,
Newey, and Rosen (1988) and extended by other researchers
(Arellano & Bond, 1991; Blundell & Bond, 1998), for two reasons.
First, firm-related effects had to be controlled, which would have
been impossible using organization-specific dummies due to the
dynamic structure of different formulated regressions. Second, this
method controlled for simultaneity biases arising from the probable
LIN
endogenous nature of several explanatory variables. The two-step
system GMM (Windmeijer, 2005) was used to estimate the substitut-
ability and complementarity effects of corporate lobbying and ETRs.
In addition, this technique determined the moderating effect of CSR
on the relationship between corporate lobbying and ETR. The System
GMM estimator was also utilized to determine the effect of corporate
lobbying on ETR as well as to develop specific dynamic dimensions
from the dataset. Based on earlier models (Brown, 2016; Waisman,
Ye, & Zhu, 2015), this study formulated the empirical relationship
between firms' corporate lobbying and ETR as follows:
ð ð
Tax Aggressiveness ðETRÞ = Corporate Lobbying + Control μi + εit
Equation (1) was also written as:
ETRit = α + β1 ETRit−1 + β2 Lobbyit + β3 Controlit + μi + εit
where lobby indicates lobbying-related expenses; ETR stands for
effective tax rate; εit is the disturbance or residual term; μi denotes
the unobserved firm-specific effect term; t represents the index's
years, and i signifies the index's firms.
All the above variables are related to terms used in different cor-
porate political surveys, such as revenue, free cash ratios, total assets
(wherein a natural logarithmic method is applied to translate the ele-
ments), advertisement intensities, and corporate leverage. To test the
hypothesis on the moderating effect of CSR between lobbying and
ETR, this study extended Equation 2 by incorporating the interaction
between CSR and Lobby. All model specifications used the interaction
term (Lobby*CSR) as follows:
ETRit = α + β1 ETRt− 1 + β2 Lobbyit + β3 CSRit + β4 ðLobby*CSRÞit + β5 Controlit + μi + εit
The consistency of the GMM estimators was evaluated with three
specification tests, that is, the Hansen test of over-identifying restrictions;
the difference-in-Hansen test for multiple instruments; and the autocorre-
lation test for disturbances (Arellano & Bond, 1991). In the Hansen test, a
failed rejection of the null hypothesis indicates the instruments' validity
and the accuracy of model specifications. In the difference-in-Hansen
test, failure to reject the hypothesis reflects the presence of multiple
instruments or a flaw in the instruments. In the autocorrelation test, the
absence of the second autocorrelation must not be rejected (AR2).
3.2 | Dynamic panel quantile regression
The Ordinary Least Squares (OLS), Fixed Effect, and System GMM
techniques use the conditional mean regression approach, which is
based on the assumption that the mean effect of corporate lobbying
on tax aggressiveness is stable and is estimated by decreasing the
mean square error to determine the conditional average of the
5
outcome variable. As corporate lobbying could affect tax aggressive-
ness and its components differently based on its distribution, the
above-mentioned conditional mean regression technique could
obscure substantial parameter heterogeneity in the relationship
between corporate lobbying and tax aggressiveness. This study there-
fore used the quantile regression technique to resolve this problem
(Koenker & Hallock, 2001). Panel quantile regressions present con-
vincing values, especially with regards to misspecification errors aris-
ing from outliers and non-normality (Koenker & Hallock, 2001).
Dynamic panel quantile regression is a technique that projects
conditional quantile functions for dependent variables. It assesses
parameters by decreasing the sum of all weighted absolute values of
residuals using weighted least squares regression. Some earlier studies
ð1Þ
(e.g.,Koenker & Bassett, 1978; Koenker & Hallock, 2001) have dis-
cussed the different quantile regression processes that can be used. In
comparison to conditional mean regression, the quantile regression
technique can manifest the impact of various independent variables
ð2Þ on the position, scale, and shape of the distribution of a dependent
variable. It also indicates the distribution's characteristics (Koenker &
Bassett, 1978; Koenker & Hallock, 2001). In this analysis, this study
ascertained the set of estimators and assigned one for each desirable
quantile τ (e.g., 0.10, 0.20, 0.30, 0.40, 0.50, 0.60, 0.70, 0.80, and 0.90).
Next, this study typified the conditional distribution of all outcome
variables by displaying the effect of each input variable on the out-
come at every quantile value (Koenker, 2004). This study achieved
this using the panel quantile regression estimates in STATA 15.
The panel quantile regression technique proposed by Koenker and
Bassett (1978) guided our investigation of the impact of corporate lob-
bying on the tax aggressiveness of AMACs. This method allowed us to
analyze the sensitivity of corporate lobbying results based on the inten-
sity levels of tax aggressiveness. The major advantages of using the
quantile regression technique are: (i) it does not exhibit sensitivity
towards outliers (Coad & Rao, 2008); (ii) it fits data with skewed distri-
ð3Þ butions (Kottas & Krnjaji
c, 2009); and (iii) it captures non-monotonous
and non-even effects of independent variables on dependent variables
(Behr, 2010). However, the greatest advantage of using the quantile
regression method in this study is that it unearthed the variances in tax
aggressiveness intensity for different quantiles, thus comprehensively
depicting variable interactions. It should also be noted that the panel
quantile regression technique thoroughly delineates the macro aspects
that could explain tax aggressiveness policies, thereby improving on
simple conditional mean regression.
Therefore, this study used quantile analysis via the Quantile
Regression Dynamic Panel Data Instrumental Variable (QRPIV) model,
which included individual fixed effects. This technique effectively
addressed the concerns of this study with regards to the different tax
aggressiveness policies and the duration of corporate lobbying activi-
ties. The panel quantile regression technique determined heteroge-
neous effects and unobserved cross-firm heterogeneity
(Chernozhukov & Hansen, 2008) in addition to assessing the different
types of interactions and asymmetry in co-movement forms.
The traditional dynamic model used for panel data with individual
fixed effects was:
6 LIN
ETRit = ηi + αETRit−1 X0it βτ + μit
wherein i = 1……n are the different firms used in the sample; βτ is a k
x 1 vector of the regression parameters related to the τth percentile;
ETRit is the dependent variable; X'i is a vector of independent vari-
ables; and μit is the error term used in the model. Based on the previ-
ous discussion of the study's hypotheses, this study proposed a
quantile regression model in Equation (6) as follows:
Qτ τ j ETRit− 1 , X0it = ηi ðτÞ + αðτÞyETRit −1 + X0 it βðτÞ
Here, Qτ (ETRitjXit) represents the τth quantile regression function
of the ETR. After preliminary examination, this study presented the
projections of quantile functions at the median for size distribution
(50th percentile) and at interquartile regressions (10th and 90th per-
centile) after projecting nine quantile regression functions: 0.01, 0.20,
0.30, 0.40, 0.50, 0.60, 0.70, 0.80, and 0.90. In the equation, η is
believed to signify the cause of “unobserved heterogeneity”, which
was not described for other covariates. Thus, it would have been diffi-
cult to approximate τ–dependent distributional firm effects. In view of
this, this study limited the estimation of firm-specific effects to be
independent of τ for all the quantiles. This constraint was used to esti-
mate the model for different quantiles.
Though Koenker (2004) described a quantile regression fixed
effects model for panel data, such a model is biased with regards to
the presence of lagged dependents as regressors. Alternatively, some
researchers (e.g., Anderson & Hsiao, 1982; Arellano & Bond, 1991)
have suggested linear regression using the Instrumental Variables
(IV) approach to generate stable estimators for dynamic panel data
models that are independent of initial conditions. These estimators
are lagged (or lagged differences of) regressors related to the regres-
sor but not correlated with error terms. As such, similar to the method
proposed by Chernozhukov and Hansen (2008), bias in the dynamic
panel quantile regression was resolved using IVs. With this approach,
lags (or differences of lags) for the exogenous variable (X) affect the
lagged term (y), but are independent of μit and can be used as instru-
ment (w) to estimate α and β using the QRPIV technique
(Galvao, 2011). Thus, the estimators were defined as follows:
     
ƞ^ðαj τ , β^ αj , τ , γ αj , τ Þ
X
K X
N X
T 
0
= min υK ρτ × ðETRIT −ƞ1 −αðτK ÞETRit −1 − XIT β τk Þ− wit0 γ ðτk Þ
ƞ, β, γ
k=1 i=1 j=1
wherein ρτ is a consequence function, νk is the weight that controls
the relative effect of the K quantiles {τi τk…}, and ηi is the fixed effect.
3.3 | Sample description
This study tested its predictions using a sample population of 162 pub-
licly trading Fortune AMACs for the period between 2008 and 2017.
In terms of sample selection, a balanced panel was not seen as
ð5Þ mandatory; hence, there were differences in the sample number per
year as the estimation technique in this study prioritized available
observations. Furthermore, to construct the database's dimensional
dynamics by adding the lagged values of the dependent variable, this
study included corporations that had been on the list for at least
seven consecutive years. Firms that did not offer complete informa-
tion were excluded from the study. This helped us understand the
interaction effect of two different non-market strategies, that is, com-
plementing or substituting, on ETRs. Ultimately, the dataset used in
ð6Þ this study comprised 162 firms in cross-section and 1129 firm-year
observations for the period between 2008 and 2017. To develop this
model, three published data sources were combined, namely (i) public
records related to the lobbying expenses of the firms; (ii) firms'
accounting statements; and (iii) a complete and accessible CSR
database.
3.4 | Measurement of variables
3.4.1 | Tax aggressiveness—Effective tax rates
This study adopted the ETR measure described by Gupta and
Newberry (1997). Though a majority of accounting-related studies
have employed various measures of ETRs based on financial state-
ment data, Gupta and Newberry's (1997) measure remains the most
favored. Plesko (2003) stated that despite none of the ETR measures
based on financial statements being correlated to confidential IRS tax
payments, the Gupta-Newberry measurement performed better than
the other measures, especially in multivariate settings. Gupta and
Newberry (1997) used the Thomson Reuter DataStream to estimate
the ETR as follows:
Effective Tax Rate
Income Taxes Total− Deferred Taxes
=
PreTax Income− Equity in Earnings + Special Items + Interest Expense
Since values for the factors of “Equity in Earnings”, “Deferred
Taxes”, “Special Items”, and “Interest Expenses” were not mentioned
in the Thomson Reuter DataStream, this study estimated the ETR
value after assuming the values of these factors as zero.

ð7Þ 3.4.2 | Corporate lobbying
Since 1998, the Centre for Responsive Politics (CRP) has compiled all
registered lobbying expenses under public records. Similar to other
studies that have used CRP data (e.g., Ansolabehere et al., 2003; de
Figueiredo & Richter, 2014), this study collected records for lobbying
expenses and PACs from the CRP's published data on the US Senate
website, as it presents organizational expenses for lobbying opera-
tions at three-month intervals since 1999. According to the 1995 Lob-
bying Disclosure Act, every firm desiring to affect US governmental
strategies or Federal programs must be registered and file bi-annual
LIN
reports on their lobbying activities and expenses at least 30 days
before the end of every six months. Notably, CRP data does not just
exclude firms' legal expenses but also bribes and other illegal methods
used to garner political influence. It is also biased against any indica-
tion of a systematic relationship between firms' political activities and
their achievement of policy outcomes.
This study noted the names of the firms mentioned in the CRP
data and assigned them unique ticker symbols. Since the CRP data
does not display any company identifiers, this study had to physically
match it with the DataStream data to verify the firms' names. Thereaf-
ter, this study merged the CRP and Thomson Reuter DataStream
datasets as per the firms' tickers. In the merged dataset, this study
combined two novel variables that were featured in the analysis,
whereby Lobbyit was defined as the natural logarithm of all lobbying
expenses (USD) of Firm i for year t. Next, this study estimated the log
values of lobbying expenses to normalize the data. The major limita-
tion of this method is that it made it impossible to determine the
amount spent by firms on specific bills. To ensure that the CRP and
financial statements were described for the same period, this study
discarded any firm that showed a non-calendar financial year-end.
Thus, based on the investigation of all dependent parameters, the
number of firms amounted to 1129.
3.4.3 | Corporate social responsibility
This study used Fortune's annual corporate reputation index as CSR
index, which is based on research carried out among some 10,000
senior executives in the USA who are asked to rate the ten largest
companies in their industry. The CSR index is characterized by the
Fortune 1000 ranking of large corporations from 70 different indus-
tries. This ranking has been carried out every Fall since 1982, and the
summarized results are announced every January in the magazine's
“America's Most Admired Companies”1 edition. The organizations
ranked by the magazine include the largest firms in 25 trade groups
and the “Top 10” companies in every group. More than 8000 external
industry experts and administrators rate firms in their field based on
nine attributes, that is, proper use of assets, financial health, long-term
investment value, product and service quality, organizational quality,
innovation, global competitiveness, ability to attract, train, and retain
employees, and fulfillment of environmental and societal obligations.
Based on firms' annual data, Fortune also scores the CSR of every firm
against its major competitors on a scale ranging from zero (poor) to
10 (excellent). Therefore, this study acquired data on firms' CSR per-
formance from Fortune magazine's reviews over the last 11 years.
This study selected this particular review for several reasons. First, it
presents comparable data of numerous organizations across 32 coun-
tries over a long period of time. While firms have been added and
deleted from the dataset due to performance changes and mergers,
the overall number has remained relatively stable. Second, the quality
of the respondents consistently reflects the various organizations
under review, as the respondents only rate the organizations they are
familiar with. They thus have direct access to the industry data
7
necessary to analyze a firm's CSR. Third, earlier studies
(e.g., Fombrun & Shanley, 1990; Fryxell & Wang, 1994; Gatzert, 2015;
Lin, Ho, Ng, & Lee, 2019; Lin, Law, Ho, & Sambasivan, 2019; McGuire,
Sundgren, & Schneeweis, 1988) have used multiple tools to evaluate
firms' CSR, which helped us relate their findings to a wider range of
literature.
3.4.4 | Control variables
The main control factors used in this study considered the impact of
corporate lobbying on the dependent parameter. At the organizational
level, this study controlled for several factors that may influence cor-
porate productivity, such as firm sales revenue, fixed assets, corporate
influence, free cash flow, and advertising expenses. Firm size was
measured using overall sales while fixed assets were reflected in the
asset sum of balance sheets. Dang, Frank) Li, and Yang (2018) and
Zimmerman (1983) stated that various proxies for firm size reflect the
differing viewpoints on firm size and have shown dissimilar results
with regards to corporate investments. For example, fixed assets are a
measure of the total assets of a firm, while total sales are related to
the product market and are not progressive. The selection of mea-
sures for firm size is thus an empirical and hypothetical issue. If this
study had aimed to control for firm size in the stock market, this study
would have used market capitalization. Conversely, to control for firm
size in the product market, this study would have used total sales.
However, this study used total assets as this study referred to firm
size as the total assets used by a firm to generate returns. This study
computed free cash flow (to equity) as net income accounting for
depreciation, net debt concerns, preferred payments, and capital
expenses as well as their effects on non-cash working assets. This
study described corporate influence using the ratio of a firm's current
assets to its current liabilities. Finally, advertising expenses and R&D
expenditures were also included as controls, as they reflect tax
aggressiveness and corporate lobbying activities (Lev, Petrovits, &
Radhakrishnan, 2010).
4 | RESULTS AND DISCUSSION
4.1 | Descriptive statistics and correlation matrix
Table 1 presents the summary of the descriptive statistics for the
AMACs. The results indicated that corporate lobbying fluctuated
between 0.1310 and 12.4798 over the studied period. Furthermore,
CSR varied from 5.210 to 9.800 with a median of 7.789, indicating
that in many cases, CSR scores were close to the average sample
value. Standard deviations of 1.8334 and 0.702 were noted for corpo-
rate lobbying and CSR, respectively, showing that CSR values were
clustered near the mean value while corporate lobbying values were
widespread. The mean effective tax value was 0.1278 with a standard
deviation of 0.1452, suggesting widely distributed data. The mean
firm size, which was measured using the logarithm of total assets, was
8 LIN

TABLE 1 Description summary

Variable Obs Mean Std. dev. Min Max
ETR 1129 0.1278 0.1452 0.4566 1.68013
Log lobbying 1119 8.3706 1.8334 0.1310 12.4798
CSR 1129 7.789 0.702 5.210 9.800
Free cash flow 1119 −0.0962 2.9798 −97.000 7.2941
R&D intensity 1129 0.1253 0.1152 −2.2000 0.5774
Advertising intensity 1129 0.1087 0.0962 0 0.5536
Log Total assets 1129 8.4112 1.8942 2.7801 13.0843
Leverage 1129 1.2382 4.6004 −0.6341 90.4000

Notes: All statistics are based on original data values.

TABLE 2 Correlation matrix

Log Free R&D Advertising Log Total

ETR lobby CSR cash flow intensity intensity assets Leverage
ETR 1
Log lobby −0.2171 1
(0.0000)
CSR −0.1151 0.0577 1
(0.0001) (0.0535)
Free cash flow 0.0370 0.1578 0.0022 1
(0.2158) (0.0000) (0.9410)
R&D intensity 0.0516 0.0582 0.0403 0.0325 1
(0.0833) (0.0516) (0.1757) (0.2772)
Advertising 0.7027 −0.3295 −0.0459 0.0494 0.0342 1
intensity (0.0000) (0.0000) (0.0984) (0.5984) (0.2511)
Log Total assets −0.3408 0.5942 0.0755 −0.4700 −0.0345 −0.4674 1
(0.0000) (0.0000) (0.0112) (0.1160) (0.2461) (0.0000)
Leverage 0.0257 0.0158 0.0147 0.0108 −0.0028 0.134 0.0048 1
(0.3891) (0.5967) (0.6222) (0.7170) (0.9240) (0.6522) (0.8707)

Notes: All statistics are based on original data values. The p-values are reported in parentheses.

8.4112, while the mean R&D intensity value was 0.1253. On average,
a sample firm reported a debt-to-asset ratio of 1.2382 and a free cash
flow ratio of −0.0962.
This study used the Pearson correlation matrix to quantify the
strength and direction of the linear correlations between the indepen-
dent and dependent variables. The correlation matrix is presented in
Table 2. The results confirmed that corporate lobbying is negatively
related to the parameters of CSR at −0.0577 (5% significance level)
and tax aggressiveness at −0.2171 (1% significance level). Further-
more, CSR showed a negative correlation with tax aggressiveness at
−0.1151 (1% significant level). The parameters in this study further
reported variance inflation factor (VIF) values that ranged between
0.141 and 1.781. The tolerance mean value was 0.951, which indi-
cated that all the variables showed a comparatively low Pearson coef-
ficient (<0.8). The results revealed that the multicollinearity issue was
non-existent in our data (Gujarati & Porte, 2008).
4.2 | Conditional mean regression model—
System GMM
To investigate the effect of lobbying on tax aggressiveness, this study
constructed two models to test Hypotheses 1 and 2. Table 3 presents
the linear panel regression results on the effect of corporate lobbying
expenses on tax aggressiveness. The models for Specifications (1) to
(5) showed a linear correlation between tax aggressiveness (based on
the ETR) and corporate lobbying for the fixed effects and static
pooled OLS estimates, as well as the dynamic fixed effects, dynamic
pooled OLS, and System GMM estimates. First, the significant positive
coefficient of the lagged dependent variables implied that the ETR
relies on its previous values. Second, the results indicated that regard-
less of the estimation method used, there is no substantial difference
between an organization's control variables (i.e., advertising and firm
size) and tax aggressiveness in the various models in Table 3. R&D
LIN 9

TABLE 3 The impact of corporate lobbying on tax aggressiveness (N = 163, T = 2008–2017): conditional mean regression models

Static panel Dynamic panel

Model 1 pooled OLS Model 2 fixed effect Model 3 pooled OLS Model 4 fixed effects Model 5 system GMM
Variables ETR ETR ETR ETR ETR

ETRt-1 0.862*** 0.0779*** 0.648***

(0.0114) (0.0156) (0.0358)
Log lobbying 0.0117*** −0.00290 0.000319 −0.000893 −0.0224***
(0.00441) (0.00304) (0.00182) (0.00325) (0.00658)
CSR −0.00132*** 0.0000253 0.0000153 0.0000267 0.000105
(0.000339) (0.000091205) (0.000141) (0.000100) (0.000122)
Free cash flow −0.00131 0.000126 −0.000107 0.0000375 −0.000751***
(0.00116) (0.000263) (0.000451) (0.000265) (0.000214)
R&D intensity 61.75 10.81 67.10 2.165 2.829
(107.5) (19.33) (44.43) (20.34) (16.53)
Advertising intensity 1.022*** 1.019*** 0.210*** 1.003*** 1.033***
(0.0371) (0.0169) (0.0189) (0.0204) (0.0173)
Log Total assets −0.0115** −0.00444 −0.00147 −0.00553* −0.00134
(0.00446) (0.00305) (0.00184) (0.00329) (0.00702)
Leverage 0.000520 0.000143 0.000284 0.0000462 0.000221**
(0.000667) (0.000147) (0.000280) (0.000149) (0.000110)
Constant 0.0845*** 0.0779*** −0.0236** 0.0617*** −0.249***
(0.0254) (0.0140) (0.0105) (0.0157) (0.0440)

Observations 1119 1119 957 957 957

R-squared 0.503 0.807 0.928 0.786
Number of firms 163 162 162
Number of instruments 23
AR1 −1.42(0.156)
AR2 −2.07(0.488)
Hansen test 18.96(0.124)
Hansen different test 14.26(0.095)

Notes: The standard errors are reported in parentheses, except for the Hansen test, AR1, AR2, and Difference-in-Hansen test. ***, ** and * indicate
significance at 1%, 5%, and 10% levels, respectively. Time dummies were included in the model specification, but the results were not reported to save
space. System GMM model was estimated using Blundell and Bond's (1998) dynamic panel system GMM estimations and Roodman's (2009) Stata
xtabond2 command.

intensity does not affect the ETR; however, free cash flow and lever-
age affect the ETR in Model 5, that is, the System GMM model.
Conversely, corporate lobbying values were dependent on the
model used. This study stated that disregarding unobservable hetero-
geneity (shown in the pooled OLS model in Table 3) and the dynamic
nature of corporate lobbying and ETR (shown in the fixed effects
model in Table 3) would generate biases. As shown in Table 3, the
OLS values displayed a positive relationship between ETR and corpo-
rate lobbying; however, the fixed effects (in the dynamic and static
models in Table 3) and dynamic pooled OLS values did not show any
such correlation. Therefore, one needs to take dynamics into consid-
eration before investigating the correlation between ETR and
corporate lobbying, since fixed effects and OLS values could lead to
biased results (Blundell & Bond, 1998).
In this study, this study tested H1 using the dynamic System
GMM. The results indicated that corporate lobbying significantly
affects the ETR, thereby supporting H1. The results also showed that
in a linear correlation, corporate lobbying negatively affects ETR quan-
tifiers. Similarly, the lagged ETR coefficients were positive and signifi-
cant, confirming that there was dynamism in the model. Similar to
earlier studies (e.g., Chen, Dyreng, & Li, 2015; Faccio, 2016; Hoopes,
Mescall, & Pittman, 2012; Kim, Li, & Zhang, 2011; Kim &
Zhang, 2016; Richter et al., 2009; Wilson, 2009), this study achieved
the expected conclusion of a negative relationship and a dynamic
10 LIN

T A B L E 4 The impact of the interaction between corporate social responsibility and corporate lobbying on tax aggressiveness (N = 163,
T = 2008–2017): conditional mean regression models

Static panel Dynamic panel

Model 1 pooled OLS Model 2 fixed effects Model 3 pooled OLS Model 4 fixed effects Model 5 system GMM
Variables ETR ETR ETR ETR ETR

ETRt-1 0.862*** 0.0779*** 0.685***

(0.0114) (0.0156) (0.0443)
Log lobbying 0.00440 −0.00402 0.00201 −0.000495 −0.123**
(0.0108) (0.00371) (0.00440) (0.00417) (0.0486)
CSR −0.00242 −0.000199 0.000271 0.0000989 −0.0242***
(0.00152) (0.000435) (0.000622) (0.000483) (0.00753)
Log lobbying*CSR 0.000129 0.0000263 −0.0000301 −0.000845*** −0.00274***
(0.000174) (0.0000498) (0.0000713) (0.0000553) (0.000909)
Free cash flow −0.00126 0.000115 −0.000118 0.0000391 −0.000988**
(0.00117) (0.000264) (0.000452) (0.000265) (0.000449)
R&D intensity −61.95 −10.94 67.11 2.240 −14.01
(107.6) (19.34) (44.45) (20.36) (37.95)
Advertising intensity 1.024*** 1.020*** 0.210*** 1.003*** 1.058***
(0.0373) (0.0169) (0.0190) (0.0205) (0.0435)
Log Total assets −0.0112** −0.00454 0.00143 −0.00554* 0.00826
(0.00448) (0.00306) (0.00184) (0.00330) (0.0142)
Leverage 0.000510 0.000144 0.000285 4.58e-05 0.000359***
(0.000667) (0.000147) (0.000280) (0.000149) (0.000124)
Constant 0.143* 0.0882*** −0.0374 0.0585** 0.946***
(0.0834) (0.0240) (0.0344) (0.0263) (0.332)

Observations 1119 1119 957 957 957

R-squared 0.503 0.807 0.928 0.786
Number of firms 163 162 162
Number of instruments 23
AR1 −2.29(0.022)
AR2 0.72(0.672)
Hansen test 21.17(0.148)
Hansen different test 17.47(0.094)

Notes: The standard errors are reported in parentheses, except for the Hansen test, AR1, AR2, and Difference-in-Hansen test. ***, ** and * indicate
significance at 1%, 5%, and 10% levels, respectively. Time dummies were included in the model specification, but the results were not reported to save
space. System GMM model was estimated using Blundell and Bond's (1998) dynamic panel system GMM estimations and Roodman's (2009) Stata
xtabond2 command.

model. These findings argue that politically lobbying organizations are
more tax aggressive as lobbying decreases detection risk, offers more
information for future changes on tax enforcement and regulation,
lowers capital market pressure for transparency, decreases the politi-
cal costs of aggressive tax planning, and displays high risk-taking ten-
dencies. Therefore, our findings affirm that a firm can receive tax
benefits through the political process.
4.3 | Conditional mean regression model:
Interaction model
As shown in Table 4, the interaction between CSR and corporate lob-
bying and its consequent effect on the ETR is presented under Model
5. To test H2, this study referred to Model 5 as it was a specified
model which depicts the effects of every variable. H2 predicted that
LIN
ETR-CSR-LOBBYING
0
-0.5
-1
-1.5
ETR
-1.80
-2
-2.25
-2.5 -2.56
-2.71
-3 -3.11
-3.5
-3.66
-4
low med high
LOBBYING
CSR high low
F I G U R E 2 Effects of corporate lobbying on tax aggressiveness:
contingent on corporate social responsibility [Colour figure can be
viewed at wileyonlinelibrary.com]
CSR would negatively moderate the relationship between corporate
lobbying and ETR. That is, when CSR increases, it is expected that the
negative correlation between corporate lobbying and ETR would be
stronger. This study found support for H2 as the results confirmed
that CSR does indeed negatively moderate this relationship. Model
5 reported a significant negative coefficient for the interaction
between CSR and corporate lobbying (β = −0.00274, p < 0.01). Thus,
the effect of corporate lobbying on ETR is stronger if a firm presents
higher CSR engagement.
Based on these results, the technique proposed by Aiken, West,
and Reno (1991) was used to display important interactive effects
(p ≤ 0.10) and show moderating effects. Based on this technique, a
standard deviation value higher or lower than the mean value would
represent higher or lower levels of moderating variables, respectively.
When a significant interaction was seen between CSR and corporate
lobbying, a visual inspection (Marques & Mintzberg, 2015) was thus
deemed necessary. Figure 2 portrays the effect of corporate lobbying
on the ETR at two different organizational CSR levels (i.e., high and
low). Upon investigating the moderating effect of CSR, this study
noted that firms' corporate lobbying activities showed a greater effect
on the ETR when they performed more CSR. On the other hand, this
relationship was weaker when firms exhibited less CSR. When firms'
CSR ratings increase, they earn a high return on their lobbying
expenses, which is reflected in their low ETRs. Thus, firms with better
CSR derive more benefits than firms with poor CSR. The fact that
firms with low CSR spend more money than CSR-neutral organiza-
tions implies that the former are potentially involved in defensive lob-
bying activities to retain existing tax benefits or to prevent the
implementation of rules or laws that increase their ETRs.
4.4 | Dynamic panel quantile regression
This study extended our empirical investigation by solving Equation (6)
at nine quantiles, that is, 10th, 20th, 30th, 40th, 50th, 60th, 70th, 80th,
and 90th quantiles, using a single list of explanatory variables. This
allowed us to determine the effect of the explanatory variables at
11
different ETR distributions. This study set the panel dynamic quantile
regression models as discussed in Section 3.2, the results of which are
presented in Table 5. This study conducted Wald-type tests for the vec-
tor β (τk) of equality of slope coefficients for all quantiles (Galvao, 2011).
In a quantile regression, the null hypothesis that all parameters at the
low quantile (τ = 0.1) are similar to those at the upper quantile (τ = 0.90)
is commonly tested. Any disparity indicates the presence of asymmetric
behavior related to the distributional location of the dependent variable,
that is, ETR. Our results rejected the null hypothesis and showed that
corporate lobbying activities at different quantiles have distinct effects
on ETRs. Therefore, corporate lobbying has a heterogeneous influence
on ETRs. Also, the results reported that the regressor's effects on ETR
indicators vary for different quantiles (Figure 3).
Initially, the effect of corporate lobbying on ETR (Table 5) was not
uniform for all the quantiles. In contrast with the System GMM
results, the quantile regression estimates were similar to earlier stud-
ies that reported the effect of corporate lobbying to be stronger for
firms with a higher ETR. For example, in Table 5, corporate lobbying
improved ETR only for high lower quantiles (wherein the coefficients
for corporate lobbying had greater negative values); however, it
showed no effect on the quantiles below 0.02. This can be attributed
to the low ETR firms being in the growth phase, whereby any invest-
ment in corporate lobbying expenses does not decrease the ETR as it
does not affect tax policies. Thus, corporate lobbying does not signifi-
cantly contribute to tax aggressiveness among low-income firms.
However, in the case of higher income firms that engage in aggressive
lobbying rather than defensive lobbying, a negative relationship was
seen between the magnitude of tax lobbying expenses and future tax
rates. This relationship between corporate lobbying and tax avoidance
is more likely to prevail among extremely high tax avoidance corpora-
tions because such avoidance transfers a significant amount of wealth
from the community to the corporation.
4.5 | Dynamic panel quantile regression:
Interaction model
To determine the moderating role of CSR in the relationship between
corporate lobbying and tax aggressiveness at different ETRs, this
study added the interaction term of CSR to Equation (6). Table 6 pre-
sents the quantile regression results with this addition. This study
employed various dynamic quantile regression techniques for differ-
ent models and considered the differential effect of corporate lobby-
ing on ETRs. Table 6 shows that corporate lobbying has a significant
negative effect on ETRs for all quantiles. The results confirmed H2's
prediction that corporate lobbying and CSR are effective for firms' tax
avoidance. This study also noted an asymmetric ETR effect, wherein
the absolute value of coefficients at lower quantiles were smaller than
the higher quantiles. Therefore, large firms with high CSR practise tax
aggressiveness by decreasing their taxes.
To uncover the distinct impact of the interaction between CSR
and corporate lobbying on ETRs, this study also plotted ETR effects
against the interaction effect of Lobbying*CSR (Figure 4). For every
 12

TABLE 5 Results of the dynamic panel quantile model with effective tax rate as the tax aggressiveness measure

(1) (2) (3) (4) (5) (6) (7) (8) (1)

VARIABLES τ = 0.10 τ = 0.20 τ = 0.30 τ = 0.40 τ = 0.50 τ = 0.60 τ = 0.70 τ = 0.80 τ = 0.90

ETRt-1 −0*** −0*** 0.0928*** 0.522*** 0.688*** 0.750*** 0.825*** 0.939*** 0.713***
(0) (0) (0.000310) (0.000496) (0.00143) (0.00128) (0.00215) (0.000335) (0.00338)
Log lobbying −0*** −0*** −0.0000776** −0.000145*** −0.000191*** −0.000190*** −0.000325*** −0.000458*** −0.000552***
(0) (0) (0.00000357) (0.0000139) (0.0000620) (0.0000378) (0.0000876) (0.0000170) (0.000156)
CSR −0*** −0*** −0.00000109 −0.000000971 0.00000663 0.0000414*** 0.0000376 −0.0000768 −0.0000786***
(0) (0) (0.00000230) (0.00000199) (0.00000449) (0.0000116) (0.00000762) (9.01e−07) (0.00000507)
Free cash flow 0*** -0*** −0.00000693** −0.00000922** −0.0000265** 0.0000105** −0.00000413 −0.0000152*** −0.0000761***
(0) (0) (0.00000311) (0.00000148) (0.0000130) (0.00000510) (0.000109) (0.00000316) (0.0000274)
R&D intensity 0*** −0*** −0.00164*** −0.00607*** −0.00745*** 0.000964* −0.00812 0.00320*** −0.00535***
(0) (0) (0.000173) (0.000186) (0.000716) (0.000576) (0.0246) (0.000140) (0.000695)
Advertising intensity 1 1 0.909*** 0.489*** 0.326*** 0.292*** 0.233*** 0.145*** 0.147***
(0) (0) (0.000634) (0.000389) (0.00291) (0.00101) (0.00609) (0.000270) (0.00259)
Log Total assets 0*** −0*** −0.0000342 −0.0000640** −0.000307* 0.000201*** −0.000443 −0.000257*** −0.00155***
(0) (0) (0.0000325) (0.0000269) (0.000163) (0.0000412) (0.00138) (0.0000189) (0.000108)
Leverage −0*** −0** −0.00000913*** −0.0000469*** −0.000102*** −0.0000691*** 0.000338 0.000548*** 0.000373***
(0) (0) (0.00000297) (0.00000863) (0.0000215) (0.0000218) (0.000300) (0.00000333) (0.0000102)

Observations 957 957 957 957 957 957 957 957 957
Number of groups 163 163 163 163 163 163 163 163 163

Notes: The values in parentheses denote the p-value. The table reports the results of the impact of corporate lobbying on ETR using the quantile regression approach. *,**, and *** indicate significance at the
10%, 5%, and 1% levels, respectively.
LIN
LIN 13

F I G U R E 3 Change in dynamic panel Tax Aggressiveness (ETR)

quantile regression coefficients for 0 0 0
corporate lobbying as quantiles vary from 1 2 3 4 5 6 7 8 9
-0.0000776
0 to 1 [Colour figure can be viewed at -0.0001
wileyonlinelibrary.com] -0.000145
-0.0002 -0.000191 -0.00019

-0.0003
-0.000325

-0.0004
-0.000458
-0.0005
-0.000552
-0.0006

F I G U R E 4 Change in dynamic panel Tax Aggressiveness (ETR)

quantile regression coefficients for 0 0 0
-0.0000137
interaction between corporate lobbying 1 2 3 4 -0.0000251
5 -0.0000299
6 -0.0000335
7 8 9
-0.00005
and CSR as quantiles vary from 0 to 1
[Colour figure can be viewed at -0.0001
wileyonlinelibrary.com] -0.000125
-0.00015

-0.0002

-0.00025

-0.0003
-0.0003196
-0.00035 -0.000347

-0.0004

dependent variable, this study determined nine quantile regressions
for quantiles ranging between 0.1 and 0.9 at a 10% increment. In
Figure 4, the horizontal X-axis shows the quantile scale while the ver-
tical Y-axis indicates the effect of the coefficients of interaction
(Lobbying*CSR) on the ETR. It can be seen that the coefficients for
Lobbying*CSR were significant and negative for all nine quantiles and
displayed a decreasing trend. These results indicated that corporate
lobbying has a greater effect on the ETR when firms exhibit higher
CSR; this is true across all quantiles of the ETR. This is consistent with
our proposition that higher tax-paying firms are involved in numerous
profit-shifting activities as the relationship between Lobbying*CSR
and ETR becomes more negative. Additionally, it is plausible that
higher CSR firms lobby to derive additional benefits from their lobby-
ing expenses, which is reflected in their lower tax rate. The results
again provided support for H2, as large firms with high CSR are more
effective at reducing their taxes. Our findings suggest that the com-
peting perspectives of shareholders and stakeholders are similar to
those in the literature. Financial benefits from social responsibility
offer bottom-line profits to shareholders while also addressing the
desires and needs of non-owner stakeholders.
5 | C O N CL U S I O N S
In this study, the researcher investigated the effect of corporate lob-
bying activities on tax aggressiveness by applying the System GMM
and dynamic quantile regression techniques to panel data for a
10-year period. This study determined the relationship between cor-
porate lobbying expenses (based on AMAC data) and the tax charac-
teristics of 162 companies (based on their ETR values). This study also
examined the moderating role played by CSR in the relationship
between corporate lobbying and tax aggressiveness. The results
showed that corporations with a high lobbying expense in a single
year pay a low ETR. This relationship is strengthened when CSR is
present. While the results did not show that all forms of lobbying
activities derive tax benefits, the dynamic quantile regression model
indicated that higher income organizations that receive more benefits
carry out lobbying. These results are consistent with the perspective
that tax lobbying is defensive and opportunistic. Firms with high CSR
spend money on lobbying to influence political decisions to lower
ETRs. This study thus conclude that lobbying activities and CSR
investments help firms derive significant tax benefits.
5.1 | Theoretical implications
This study contributes to the existing literature in multiple ways. First,
it unearthed a determinant of corporate tax aggressiveness by identi-
fying corporate lobbying as an important factor that influences tax
aggressiveness. Second, the results add to the literature on tax avoid-
ance and corporate lobbying by establishing and explaining a mecha-
nism used by firms to reduce their tax payments. Third, this study
 14

TABLE 6 Results of the dynamic panel quantile model with effective tax rate as the tax aggressiveness measure (interaction between corporate lobbying and corporate social responsibility)

(1) (2) (3) (4) (5) (6) (7) (8) (1)

VARIABLES τ = 0.10 τ = 0.20 τ = 0.30 τ = 0.40 τ = 0.50 τ = 0.60 τ = 0.70 τ = 0.80 τ = 0.90

ETRt-1 −0*** −0*** 0.0931*** 0.538*** 0.691*** 0.741*** 0.831*** 0.941*** 0.719***
(0) (0) (0.0000321) (0.0195) (0.000189) (0.000140) (0.000923) (0.00133) (0.00455)
Log lobbying 0*** −0*** 0.000122*** 0.0144 0.00146*** 0.000912*** 0.000632*** 0.00114*** −0.000523
(0) (0) (0.0000130) (0.0266) (0.0000418) (0.0000351) (0.000127) (0.000224) (0.000377)
CSR 0*** −0*** 0.0000134*** 0.00185 0.000183*** 0.000111*** 0.000127*** 0.000182*** −0.0000447
(0) (0) (0.00000149) (0.00333) (0.00000644) (0.00000462) (0.00000283) (0.0000328) (0.0000781)
Log lobbying*CSR −0*** 0*** −0.0000137*** −0.000251*** −0.0000209*** −0.00000135*** −0.0000125*** −0.0000196*** 0.0000147***
(0) (0) (0.000000176) (0.0000452) (0.000000660) (0.000000518) (0.00000269) (0.00000357) (0.00000791)
Free cash flow −0*** 0*** −0.0000509*** −0.00000318 −0.0000359*** −0.0000295*** 0.00000838*** −0.0000354*** −0.0000708*
(0) (0) (0.000000835) (0.000157) (0.00000189) (0.00000223) (0.00000228) (0.00000620) (0.0000403)
R&D intensity −0*** 0*** −0.00135*** −0.00133 −0.00659*** −0.00239*** 0.000342 0.00272*** −0.00664***
(0) (0) (0.0000370) (0.0274) (0.000178) (0.0000525) (0.000230) (0.000189) (0.000820)
Advertising intensity 1 1 0.908*** 0.428*** 0.328*** 0.296*** 0.220*** 0.142*** 0.149***
(0) (0) (0.0000525) (0.121) (0.000224) (0.000182) (0.000675) (0.00208) (0.00441)
Log Total assets −0*** 0*** −0.0000150*** 0.000983 −0.000291*** −0.000240*** −0.000188*** −0.000602*** −0.000864***
(0) (0) (0.00000257) (0.00164) (0.0000144) (0.0000139) (0.0000252) (0.00000705) (0.000192)
Leverage −0*** −0*** −0.00000160 0.000111 −0.0000777*** 0.000204*** 0.000507*** 0.000549*** 0.000329***
(0) (0) (0.00000142) (0.000419) (0.00000483) (0.00000462) (0.00000451) (0.00000342) (0.0000231)

Observations 957 957 957 957 957 957 957 957 957
Number of groups 163 163 163 163 163 163 163 163 163

Notes: The values in parentheses denote the p-value. The table reports the results of the impact of the interaction effect between CSR and corporate lobbying on ETR using the quantile regression approach.
*,**, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.
LIN
LIN
determined the moderating role played by CSR in the correlation
between ETR and corporate lobbying. The results showed that firms
with higher CSR display more corporate lobbying to avoid taxes, pos-
iting that taxes and CSR act as substitutes instead of complements.
Fourth, this study applied the quantile regression technique to over-
come the limitations of the conditional mean regression in reporting
the average effect of corporate lobbying on the ETR. As per Koenker
and Bassett (1978), the quantile regression presents the effect of cor-
porate lobbying on different quantiles of the ETR distribution. This
technique also determined if corporate lobbying has a homogeneous
effect on the overall ETR distribution.
5.2 | Managerial implications
The results presented in this study carry valuable implications for cor-
porate stakeholders who regard corporate lobbying and CSR as neces-
sary activities by public companies and tax policymakers in developing
tax reform legislation. Hillenbrand, Money, Brooks, and Tovstiga (2019)
argued that firms should understand the plurality of stakeholders and
reconcile mixed signals from different groups. The results of this study
imply that an influential section of stakeholders in US public organiza-
tions do not consider tax payment a socially responsible activity.
Brooks, Godfrey, Hillenbrand, and Money (2016) stated that govern-
ment officials would trade corporate tax revenue for higher employ-
ment and other taxes from additional economic activities if the
governmental regime allows more foreign direct investment. If
policymakers want to carry out social welfare, they need to understand
the relevance of this trade-off when designing tax laws.
5.3 | Policy implications
The findings of our study advocate caution in scrutinizing firms' lobby-
ing and CSR activities, as politically lobbied corporations that appear
socially responsible might pay lower taxes than less socially responsi-
ble corporations, eventually decreasing government income and
thereby government expenditure on infrastructure, defence, educa-
tion, and healthcare services (Sikka & Willmott, 2010). According to
one school of thought, paying less taxes is justified when compen-
sated for through more CSR. This study is thus vital for policymakers
and tax agencies to recognize the potential issues that encourage
firms to indulge in tax aggressiveness strategies. Policymakers should
change existing rules and regulations to mitigate the problem of cor-
porate tax avoidance and to accurately tax firm income. Firms, on
their end, should publish accurate information on taxes in their CSR
disclosures to minimize reputational risk (Sikka & Willmott, 2010).
5.4 | Limitations
This study is not without its limitations. First, though a few filters
were used to identify lobbying issues, the existing lobbying data could
15
not be reliably linked to specific lobbying-related issues. The data on
lobbying expenses reflects the amount paid for lobbying activities as a
whole, not for tax lobbying alone. This may have biased our results as
this study used tax rate as the dependent variable. Also, other political
activities (e.g., PAC, campaign contributions, industry group lobbying,
or unreported personal interactions) are not captured by the lobbying
variable. Another limitation of our study is the use of the tax rate to
measure the effect of lobbying, since the tax rate is influenced by
many factors besides lobbying and varies each year. Also, it is difficult
to ascertain when successful lobbying effects would be reflected in
tax rates because of the variability and length of the policymaking
process. Hence, other researchers (e.g., Alexander et al., 2009a; Cao,
Fernando, Tripathy, & Upadhyay, 2018) investigated the different lob-
bying activities surrounding a particular legislation item. Though the
use of the tax rate as a dependent variable improves generalization of
the results, it remains less impactful and economically less significant
than other outcomes.
OR CID
Woon Leong Lin https://orcid.org/0000-0002-6568-412X
ENDNOTE
1
For details of the methodology, please visit: http://fortune.com/worlds-
most-admired-companies/list/.
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How to cite this article: Lin WL. Giving too much and paying
too little? The effect of corporate social responsibility on
corporate lobbying efficacy: Evidence of tax aggressiveness.
Corp Soc Responsib Environ Manag. 2020;1–17. https://doi.
org/10.1002/csr.2098