Professional Documents
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Bài 12
Bài 12
Bài 12
Michael A. Mayberry 1
Luke Watson 2
August 2020
Abstract
We employ states’ enactment of constituency statutes as plausibly exogenous shocks to the
marginal cost of corporate social responsibility (CSR) and examine the relation between CSR and
corporate tax avoidance. We find almost no evidence of an association between the enactment of
constituency statutes and tax avoidance. We use confidence intervals and other analysis to rule out
low power as an explanation. Using an instrumental variables design, we find evidence that third-
party CSR scores increase following constituency statutes, yet without a detectable impact on tax
avoidance. The lack of results across multiple proxies and specifications suggests firms decouple
CSR from tax policy. Our study introduces a strong identification strategy common in management
research to the accounting literature, producing a novel no-result finding on a popular research
question.
Acknowledgements
We thank two anonymous reviewers, Brad Badertscher, Sam Bonsall, John Gallemore, Lisa Hinson, Justin
Kim, Stacie Laplante (editor), Dan Lynch, Marcus Kirk, Scott Rane, David Reppenhagen, Connie Weaver,
Jaron Wilde, and workshop participants at Oklahoma State University, the University of Arizona, the
University of Cincinnati, and Villanova University for thoughtful comments. The authors are grateful for
financial support from the Jack Kramer Term Professorship, Fisher School of Accounting, and Warrington
College of Business at the University of Florida (Mayberry); and the LeBow College of Business at Drexel
University and Villanova School of Business (Watson).
1
University of Florida. Address: P.O. Box 117166, Gainesville, Florida 32611; phone: 352 274 1691; fax: 352 392
7962; e-mail: michael.mayberry@warrington.ufl.edu
2
Corresponding author. Villanova University. Address: Bartley Hall, 800 East Lancaster Avenue, Villanova,
Pennsylvania 19085; phone: 610 519 4352; e-mail: luke.watson@villanova.edu
tax avoidance. Theoretically, three plausible hypotheses pertain to this relation. First, the
transparent reporting hypothesis (Kim, Park, and Wier 2012) suggests tax avoidance undermines
the credibility of firms’ CSR investments and policies, leading to a negative relation. Second, the
hedge against the risks of tax avoidance, leading to a positive relation (Hoi, Wu, and Zhang 2013).
Third, the decoupling hypothesis suggests firms fail to integrate CSR into their tax policies, leading
to no relation. Firms decouple when facing competing objectives and lacking a clear consensus as
to the optimal strategy (Crilly, Zollo, and Hansen 2012). For example, socially responsible hiring
practices emphasizing the welfare of women and minorities would not be informative about firms’
use of tax shelters. Firms could decouple CSR from tax avoidance because of the conflicting
objectives and preferences between responsibly paying their “fair share” of tax and reducing their
tax burden.
experiment in which directors are, for the first time, legally permitted to consider nonshareholders’
implicit claims on firm resources in their business decisions (Flammer and Kacperczyk 2016).
Constituency statutes thereby “dramatically shift” the CSR environment (von Stange 1993). This
exogenous reduction in the expected marginal cost of CSR activities (Luoma and Goodstein 1999)
yields a setting for an intention-to-treat analysis (Lazuka 2020; Rouse 1998; Bailey, Malkova, and
in a given state rather than headquartered there, making it unlikely that local economic conditions
or social norms confound our research design because most firms have headquarters and/or
operations outside of their state of legal incorporation. Using this identification strategy common
in management research, we examine whether CSR is associated with corporate tax avoidance.
several ways. First, legal scholars conclude that a review and analysis of case law “confirms the
potency of constituency statutes” (Geczy, Musto, Jeffers, and Tucker 2015). Second, numerous
studies indicate these statutes increase socially responsible decisions in multiple contexts.5 Third,
we perform validation checks within our sample. We find that following the enactment of
constituency statutes, firms have higher third-party CSR ratings. Together, these prior studies and
our current findings provide confidence that constituency statutes are a legitimate and significant
Our primary analyses use a sample of 59,839 firm-year observations spanning the years
1987-2010, during which 27 states enacted constituency statutes. This variation allows us to test
our research question in a difference-in-differences model specification with both firm and
headquarters state-by-year fixed effects, thereby isolating the firm-level change in corporate tax
avoidance around the enactment of constituency statutes while extracting the effects of local
3
Constituency statues are permissive and, with the exception of Connecticut, do not legally require consideration of
stakeholders. As such, noncompliance can occur when firms do not change their CSR in response to constituency
statutes. The decision to comply is endogenous at the firm level. Therefore, assuming the timing of constituency
statutes is exogenous to an individual firm, the effect of intention-to-treat is the “only unambiguously unbiased
estimate” (Rouse 1998). We perform two analyses to alleviate concerns regarding noncompliance. First, we use
instrumentation of CSR to quantify the local average treatment effect of changes in CSR on tax avoidance. Second,
we validate firms’ on-average response to constituency statutes.
4
Whether firms pursue optimal levels of CSR is outside the scope of our research question. Rather, we simply use
the enactment of constituency statutes as a plausibly exogenous reduction in the expected marginal cost of CSR.
5
We discuss these studies under the heading “Natural Experiment” in the Methodology section.
find a statistically significant association between firms’ CSR environment and tax avoidance,
measured using both book and cash basis effective tax rates (ETRs). Therefore, our results are
Given our lack of results so far, the reader might question whether our tests lack power.
We offer three reasons why a lack of power does not explain our results. First, we examine the
confidence intervals around our coefficient estimates and find they are sufficiently narrow (Cready
et al. 2019). Low power should reduce statistical significance but not economic significance. The
largest plausible interpretation of our coefficients (i.e., the 5th and 95th percentiles of the confidence
intervals) are both economically insignificant (i.e., less than 11 percent of a standard deviation).
Second, we compute the size of the treatment effect necessary to obtain statistical significance
given our standard errors. The treatment effects would need to be far larger than we document,
which would make their magnitudes economically implausible. Third, other studies obtain
statistically significant results using state constituency statutes across a variety of settings, and we
show constituency statutes produce observable changes in CSR activity within our sample. For
To this point, we have failed to find evidence of an on average relation between CSR and
tax avoidance, yet it is possible that a relation exists in a subset of firms. Therefore, we investigate
changes in tax avoidance in subsamples of firms most likely to increase CSR activities because of
constituency statutes. Prior research identifies industries that are particularly sensitive to
environmental and social concerns (Cho and Patten 2007). However, initial evidence of a positive
relation between CSR and tax avoidance in this subsample appears specious because it has an
Next, we address the joint hypothesis problem wherein it is possible we lack results
because: (1) CSR is decoupled from tax avoidance or (2) constituency statutes do not produce
sufficient variation in CSR to result in detectable changes in tax avoidance. Our validation tests
employ an instrumental variables approach to measure the local average treatment effect of CSR
activities on tax avoidance. In the first stage, we find third-party CSR scores (our proxy for CSR
activities) increase following the enactment of constituency statutes. In the second stage, we
investigate whether this exogenous variation in third-party CSR scores after enactment of
constituency statutes relates to tax avoidance. We find no evidence of an association between CSR
scores and tax avoidance, suggesting firms decouple CSR activities from tax avoidance.
The relation between CSR and tax avoidance has generated significant interest in
accounting research, although extant findings are inconsistent. On one hand, Hoi, Wu, and Zhang
(2013) and Lanis and Richardson (2015) produce evidence of a negative association between CSR
and tax avoidance consistent with the transparent reporting hypothesis. On the other hand, Davis,
Guenther, Krull, and Williams (2016) produce evidence of a positive association between CSR
and tax avoidance consistent with the opportunistic reporting hypothesis. While these studies differ
along minor dimensions, they reach different conclusions. Despite the inconsistent findings, these
prior studies share a common identification strategy of relying upon third-party ratings of CSR to
proxy for CSR activities (i.e., MSCI, formerly KLD). Third-party CSR ratings carry serious
endogeneity concerns which call into question the reliability of inferences derived therefrom.6
6
Additionally, relying on third-party ratings agencies severely limits sample size, which impairs statistical power and
creates generalizability concerns. For example, MSCI only issued ratings for the S&P 500 from 1991 – 2001.
possibility of simultaneity bias (Al-Tuwajiri, Christensen, and Hughes 2004; Watson 2015; Kang,
Germann, and Grewal 2016). Second, firms manipulate CSR-related disclosures to manage their
perceived reputation, biasing the information set of third-party ratings to the extent that the ratings
are “driven more by what firms say than what they do” (Cho, Guidry, Hageman, and Patten 2012,
14). Third, firms undertake strategic CSR activities and disclosures to attract ratings or at ratings
initiation, creating selection bias (Dhaliwal, Li, Tsang, and Yang 2011). Fourth, various agencies
produce ratings that are not highly correlated, suggesting low validity (Chatterji, Durand, Levine,
and Touboul 2016).7 Acknowledging the endogeneity and validity issues inherent in third-party
CSR ratings, Huang and Watson (2015) recommend using alternative identification strategies to
Our results call into question prior evidence of associations between CSR and tax
avoidance, to the extent our identification strategy mitigates the endogeneity concerns in prior
studies. Moreover, our evidence of decoupling holds across an extensive battery of robustness tests
and alternate specifications including multiple proxies for tax avoidance, exclusion of Delaware-
incorporated firms, exclusion of potentially weak constituency statutes in Texas and Nebraska,
separate analysis of the most stringent constituency statutes in Maryland and North Carolina,
entropy balancing to create covariate-matched control and treatment groups, and including
Consistent with MSCI ratings offering a low-power setting, less than one-quarter of our observations in our final
sample contain CSR scores provided by MSCI. MSCI expanded to cover the Russell 3000 in 2003, which only
overlaps with Texas’ and Nebraska’s constituency statute enactments.
7
Chatterji et al. (2016) conclude “the low convergent validity we report implies that the results of prior academic
studies using [CSR ratings] should be reassessed.” We respond to this call for future research using an alternative
strategy to assess firms’ CSR.
on the relation between CSR and tax avoidance. Prior studies show this relation going in various
directions (Hoi et al. 2013; Lanis and Richardson 2015; Davis et al. 2016; Watson 2015) and our
findings suggest that with a more exogenous research design, the evidence supports decoupling.
experiment that has been used in other business disciplines to an accounting-related question. This
identification strategy should be useful in studying future research questions. Extant accounting
research on CSR has largely ignored natural experiments and other useful identification strategies,
prompting a call for improved research design (Huang and Watson 2015). We show these
identification strategies can result in different inferences than those found using third-party CSR
ratings common in academic research. Third, we contribute to the vast literature on corporate tax
avoidance (Hanlon and Heitzman 2010; Shevlin 2015) by identifying a rare finding of no
studies suggesting non-shareholders materially affect reporting behavior (e.g., Ertimur, Ferri, and
Maber 2012; Dyreng, Hoopes, and Wilde 2016) and contribute to an unbiased body of knowledge
through no-result findings (Bettis, Ethiraj, Gambardella, Helfat, and Mitchell 2016). Finally, we
caution readers that despite our consistent lack of evidence, we cannot prove no relation exists
between CSR and tax avoidance. It remains possible that a relation exists in an unexplored avenue,
such as a dynamic treatment effect that varies cross-sectionally. Thus, our study complements,
8
Studies using staggered difference-in-difference designs with no result findings have been published in economics
and finance (e.g., Amihud and Stoyanov 2017; Meghir, Palme, and Simeonova 2018; Pagalyan 2019) as well as
accounting (Chen, Cheng, Lin, Lin, and Xiao 2016; Bills, Lisic, and Seidel 2017).
which is required by law” (McWilliams and Siegel 2001), is of growing interest to financial
researchers. Recent research finds CSR enhances firms’ reputations for transparency. For example,
Gao, Lisic, and Zhang (2014) and Hong, Kubik, Liskovich, and Scheinkman (2019) find CSR
predicts decreased insider trading and decreased violations of the Foreign Corrupt Practices Act,
respectively. These results suggest CSR signals corporate transparency in areas beyond traditional
CSR dimensions.
Firms benefit from transparency both generally (Gelb and Zarowin 2002; Brown and
Hillegeist 2007) and specifically from the transparent reputation gained through CSR. For
example, Lins, Servaes, and Tamayo (2017) find socially responsible firms outperformed other
firms during the 2008-09 financial crisis, implying social capital creates trust between the firm and
stakeholders. Similarly, Deng, Kang, and Low (2013) find CSR increases value creation around
U.S. mergers. Also consistent with CSR signaling corporate transparency, Dhaliwal et al. (2011)
find firms initiating CSR reporting enjoy a lower cost of equity capital. In terms of tax outcomes,
Lanis and Richardson (2012) find transparent CSR disclosure negatively relates to tax avoidance.
To the extent that CSR signals a firm values transparency, CSR should be negatively
related to tax avoidance. First, tax avoidance undermines the transparent reputation gained through
CSR, threatening CSR’s ability to generate future sales and enjoy lower coordination and
contracting costs with important stakeholders. Shiu and Yang (2017) note the reputational benefits
of CSR do not persist in the face of recurring negative shocks to reputation, suggesting firms must
coordinate their reporting alongside their other CSR activities to maximize the benefits of CSR.
Moreover, taxes represent a contribution to the wellbeing of the communities in which firms
Initiative and the UN Global Compact, emphasize the importance of paying taxes to protect the
interest of local communities and encourages investors to engage firms on the issue of corporate
tax responsibility and paying their “fair” share (GRI 2011; UN 2015). Watchdog groups such as
Citizens for Tax Justice frequently cite firms’ effective tax rates in evaluating corporate citizenship
(Gardner, Roque, and Wamhoff 2019). Therefore, perceptions that aggressive tax policies are
‘unfair’ or ‘unethical’ undermine a firm’s ability to garner reputational benefits from CSR.
Second, some evidence suggests tax avoidance benefits shareholders (Arya, Glover, and
Sunder 1998; Goh, Lee, Lim, and Shevlin 2016) to the detriment of fixed claimants (Hasan, Hoi,
Wu, and Zhang 2014; Bonsall, Koharki, and Watson 2017). To the extent this is true, tax avoidance
runs contrary to the stated goals of CSR. For example, CSR emphasizes employee welfare. Prior
evidence suggests risk-averse employees prefer lower levels of tax avoidance because tax
avoidance increases their risk without a concomitant increase in compensation (Chyz, Leung, Li,
and Rui 2013). Directly related to our research question, Hoi et al. (2013) and Lanis and
Richardson (2015) find a negative association between CSR and tax avoidance, consistent with
Opportunistic Reporting
While firms can signal transparency and commitment to social norms through CSR, firms
can alternatively exploit the reputational benefits of CSR to hedge or otherwise counterbalance the
costs of dishonest behaviors which violate social norms. CSR offers insurance-like benefits when
firms experience negative reputation shocks (Koh and Tong 2013; Lins et al. 2017). By actively
adhering to social norms in certain dimensions, firms can influence how external stakeholders
perceive their conformity to social norms along other dimensions. For example, stakeholders are
The insurance-like benefits of CSR therefore provide slack for firms to pursue otherwise
socially unacceptable activities. Along these lines, firms’ charitable donations are increasing in
corporate social irresponsibility (Muller and Kraussl 2011), suggesting CSR in one dimension
(charitable giving) lowers the cost of socially irresponsible behaviors in other dimensions.
Similarly, Chakravarthy, deHaan, and Rajgopal (2014) find firms increase diversity initiatives and
charitable giving following restatements, suggesting CSR can otherwise lower the cost of financial
impropriety. Cho, Roberts, and Patten (2010) suggest that firms alter their disclosure tone to make
weak CSR-related performance appear stronger (Cho et al. 2010). Thus, firms can use CSR as an
insurance-like tool to mitigate the effects of negative events and otherwise minimize the overall
cost of opportunistic behaviors (Kruger 2015; Lins et al. 2017) such as tax avoidance.
Indeed, prior studies suggest investors react less negatively to accusations of financial
impropriety—such as option backdating (Janney and Gove 2011) and restatements (Wans 2017)—
for firms with higher levels of CSR. Similarly, Wans (2017) finds legal consequences, such as the
probability of a class action lawsuit following a restatement and overall costs of legal settlements
given a restatement, are less severe for firms with higher levels of CSR. Along these lines, Kim
and Venkatachalam (2011) find firms in socially irresponsible industries have higher financial
reporting quality, suggesting firms offset the cost of poor CSR through more transparent reporting.
Directly related to our research question, Davis et al. (2016) document a positive association
between CSR and tax avoidance, consistent with the opportunistic reporting hypothesis.
Decoupled Reporting
fail to integrate–or decouple—their commitment to CSR throughout all aspects of the firm (Crilly
et al. 2012). Weaver, Trevino, and Cochran (1999, 539) describe the possibility that CSR is “easily
decoupled from a firm’s normal, ongoing organizational activities” and provide multiple anecdotes
of managers being unaware of their own firms’ CSR policies. Colloquially put, while firms adopt
socially responsible environmental policies or child labor policies, CSR decoupling allows most
decision makers within the firm to continue “business as usual.” Therefore, observing CSR in one
dimension of a firm’s behavior is uninformative about its adherence to social norms in other
dimensions.
Firms decouple CSR from other business dimensions when facing conflicting goals arising
from multiple stakeholders (Meyer and Rowan 1977) as well as when decision making is
decentralized to allow agents to pursue different goals (Crilly et al. 2012). Prior work notes
decoupling in many areas, including marketing (MacLean and Behnam 2010; Trullen and
Stevenson 2006), supply chain management (Jamali, Lund-Thomsen, and Khara 2017), quality
control (Westphal, Gulati, and Shortell 1997), and financing (Westphal and Zajac 2001).
Suggesting consumers are aware of the pervasiveness of CSR decoupling, Di Giuli and
Kostovetsky (2014) fail to find an association between CSR expenditures and sales, suggesting
CSR spending does not influence firms’ reputations with consumers. Therefore, when firms
integrate CSR into various strategic aspects—e.g., human resources or marketing—they do not
Tax avoidance meets the necessary criteria for decoupling from CSR. First, evidence
suggests the stakeholders traditionally targeted by CSR may not consider tax avoidance.
Specifically, Gallemore, Maydew, and Thornock (2014) find little evidence that aggressive tax
10
such as effective tax rates. However, the recent rise of CSR reporting standards and usage of stand-
alone CSR reports (e.g. SASB, GRI, IRRC) suggest stakeholders’ demands for CSR information
extend well beyond financial metrics (Joshi and Li 2016). Moreover, accounting’s emphasis on
the entity concept and the financial consequences of monetary transactions substantially limits its
ability to reflect CSR, which, by definition, requires categorizing and quantifying nonfinancial
benefits and costs to stakeholders beyond the corporate entity itself (Aras and Crowther 2009;
Second, firms may not always consider tax policy part of the CSR environment and may
not integrate it into CSR control systems and performance evaluation (Ditillo and Lisi 2016; Gond,
Grubnic, Herzig, and Moon 2012).9 Likewise, Davis et al. (2016) find a lack of consistency in
whether and how a small sample of firms discuss taxes in their CSR reports. Third, corporate
officers with primary responsibility for CSR (e.g. Chief Sustainability Officer, Vice President of
Human Resources) rarely, if ever, interject on the roles of those involved in tax avoidance (e.g.
CFO, Vice President of Tax). Surveys confirm that, in practice, firms rarely integrate financial
statement and tax preparers into CSR (KPMG 2009; AICPA et al. 2010; Ballou, Casey, Grenier,
and Heitger 2012). Given the potential divergence between CSR and firms’ tax objectives,
controls, and personnel, as well as the potentially conflicting objectives between maximizing
financial performance and social performance, firms may decouple the CSR environment from the
tax function. As a result, the decoupling hypothesis predicts no relation between CSR and tax
avoidance.
9
Gond et al. (2012) state that sustainability controls “remain peripheral and decoupled from core business activities
and fail to reshape strategy” (pg. 206). This is consistent with our assertion that there will be little overlap between
decision makers in the accounting and finance departments—who would engage in tax avoidance—and those who
carry out CSR activities.
11
Natural Experiment
variation in the marginal cost of corporate social responsibility (Flammer and Kacperczyk 2016;
Nguyen, Kecskes, and Mansi 2017). The origins of constituency statutes come from academic
theories of stakeholder orientation and CSR. Historically, state law mandated directors and
managers to maximize shareholder value, a legal doctrine dubbed “shareholder primacy” (Orts
1992). However, following legal and academic debates regarding the fiduciary duties directors
owe to shareholders, many states passed constituency statutes that specifically permit or require
directors and managers to consider non-shareholder stakeholders in their operational and structural
decision making. For example, 15 Pa. Cons. Stat Section 516(a) reads:
years of enactment in Table 1.10 The statutes generally enjoyed widespread support from
“politically diverse coalitions” (Orts 1992, 25) as they helped protect stakeholders from potential
10
We obtain this list from Flammer and Kacperczyk (2016). 34 states have passed these statutes. However, we are not
able to exploit the first eight laws (Ohio, Illinois, Maine, Arizona, Minnesota, New Mexico, New York, and
Wisconsin) because they either occur before our sample period or in the first year of our sample period and thus lack
a valid observation in the pre-treatment time period. In concurrent work, Mathers, Wang, and Wang (2018) use a
different set of treatments that we have not seen used in the empirical constituency statute literature and find evidence
of a positive association between these events and corporate tax avoidance in the years 1970-2014. Our no-result
findings do not change using their sample period or adjusting our treatment events when it is unclear which list is
correct. Untabulated analysis suggests their results are sensitive to these choices.
12
(Orts 1992).
Legal scholars conclude such laws represent a “dramatic shift” in the CSR environment of
firms incorporated in a given state because decision makers are now, for the first time, legally and
explicitly able to consider stakeholders’ best interests in addition to those of shareholders (von
Stange 1993). Geczy et al. (2015, 114) review 47 cases pertaining to constituency statutes and
conclude these laws changed directors’ duties, stating “it is clear that constituency statutes were
seen… as a true expansion of directors’ authority.” Further, their enforcement review concludes
these laws affected court rulings, which “confirms the potency of constituency statutes” (p. 77).
In addition to validation by legal scholars, the management literature has exploited and
validated constituency statutes as exogenous decreases in firms’ CSR constraints. For example,
constituency statutes increase both stakeholder representation on boards (Luoma and Goodstein
1999) and innovation (Flammer and Kacperczyk 2016). Following constituency statutes, banks
reduce their risk taking (Leung, Song, and Chen 2019) and firms’ loan spreads decrease (Gao, Li,
and Ma 2019). Boards are more likely to explicitly tie executive compensation to CSR-related
goals following the constituency statutes (Flammer, Hong and Minor 2019). Perceptions of
product quality also increase (Bardos, Ertugrul, and, Gao 2019). Each of these studies follows an
Research Design
For our tax avoidance tests, we estimate the following OLS regression with firm and state
13
where TAX is one of our two tax avoidance proxies. Our first tax avoidance proxy is GAAP ETR
(ETR) defined as the ratio of total tax expense (TXT) to pretax income (PI - SPI).11 Our second
tax avoidance proxy is cash ETR (CETR), equaling the ratio of cash taxes paid (TXPD) to pretax
income minus special items (PI - SPI) (Dyreng, Hanlon, and Maydew 2008).12 We require positive
denominators with both tax avoidance measures. We winsorize ETR and CETR to fall on the [-1,
1] interval, thereby capturing negative tax expense and gross tax refunds rather than resetting such
values to zero, in line with the “second sample” in De Simone, Nickerson, Seidman, and Stomberg
(2019).13 Both tax avoidance proxies are decreasing in tax avoidance. Hausman (1978) tests
suggest the necessity of including both firm and headquarters state-by-year fixed effects in both
Our variable of interest (POST) is an indicator variable equaling one for firms incorporated
in a state in the years following the enactment of a constituency statute and zero otherwise. In this
intention-to-treat analysis, although not every firm necessarily changes its CSR activities
following treatment, the constituency statute nonetheless is present and reduces the marginal cost
of CSR in treated firms (Lazuka 2020; Rouse 1998; Bailey et al. 2019; Deming 2011).15 A positive
11
We set missing values of SPI to zero.
12
To more precisely identify changes in tax avoidance around the specific year in which a constituency statute is
enacted we use annual ETR measures, rather than long-term ETRs which would be contaminated by pre-treatment
values and therefore biased against finding results.
13
In untabulated analysis, we winsorize ETR and CETR to [0,1] and repeat our analysis in Table 3, Panels A and B,
and Table 4, as well as a similar analysis with industry and year fixed effects. These regressions yield statistically
insignificant results, consistent with our primary analysis.
14
Specifically, a Hausman (1978) test compares a firm fixed effects model against a firm random effects model,
with a significant test statistic suggesting firm fixed effects are the preferred specification. Consistent with the need
for firm fixed effects, we find a strongly significant chi-squared statistic in both specifications (p < 0.01). Moreover,
we compare a firm fixed effect model with year fixed effects against one with state-by-year fixed effects. Again, we
find a highly significant chi-squared statistic in both specifications (p < 0.01).
15
Our intention-to-treat research design is no different from a vast array of economics and medical methodologies
(Lazuka 2020; Rouse 1998; Bailey et al. 2019; Deming 2011). For instance, with regards to medical research,
14
reductions the marginal cost of CSR, consistent with the transparent (opportunistic) reporting
hypothesis.16 A coefficient indistinguishable from zero on POST would be consistent with the
decoupling hypothesis.
concerns than prior literature. States implement constituency statutes at different points in time,
implying general macroeconomic trends will not bias our results. We remove firm-specific
idiosyncrasies (e.g. strategies, religiosity or political preference from which firms draw their
managers, etc.) by including firm fixed effects. Additionally, including headquarters state-by-year
fixed effects allows us to extract away the effects of local economic conditions, changes in state
and local taxes, and prevailing social attitudes on firms’ tax avoidance because constituency
statutes affect firms incorporated in a given state and not firms merely located in a state. Therefore,
firms experiencing the same introduction of the same constituency statute do not experience the
same economic, social, and political conditions as most firms are headquartered in jurisdictions
other than where they are incorporated. For an omitted variable to explain our results, it would
need to be correlated with a change in tax avoidance in a firm’s legal environment in the given
patients can be assigned into a treatment (e.g., told to take a pill) yet given the obvious ethical concerns, patients
cannot be forcibly compelled into treatment (e.g., physically swallowing the pill). In our context, we have plausibly
exogenous assignment into treatment (e.g., legal consideration of stakeholders) but firms may not comply. However,
the permissive nature of constituency statutes is not strictly what causes noncompliance. We note that compliance is
a concern when using any law. For instance, Sarbanes-Oxley’s provisions were largely mandatory. Yet empirical
evidence suggests compliance was far from perfect (e.g., Rice, Weber, and Wu 2015). Nonetheless, Sarbanes-Oxley
is regularly used for identification.
16
Some evidence suggests effective tax rates have been declining with time (Dyreng, Hanlon, Maydew, and Thornock
2017); however, contrary evidence also exists (Edwards, Kubata, and Shevlin 2017). We confirm our results are robust
to any potential macroeconomic trend. First, we calculate the number of firms per year with a tax rate below the
statutory rate. During the first half of our sample period, we find approximately 48% (70%) of firms have ETRs
(CETRs) below the statutory rate. This is consistent with ample tax planning opportunity existing in the early part of
our sample. In the second half of our sample period, tax planning does appear to increase as 63% and 79% of firms
have ETRs and CETRs below the statutory rate. Second, we create a trend variable, counting the number of years since
the start of our sample in 1987, and include it in Equation (1). We continue to find a statistically insignificant
coefficient estimate on POST, suggesting macroeconomic trends do not impact our conclusions.
15
shocks at the firms’ headquarters state.17 In reviewing the political economy of constituency
statutes, Flammer and Kacperczyk (2016) fail to find other concomitant and confounding law
changes, which mitigates the primary endogeneity concern for a natural experiment.
We draw on prior literature to identify the control variables in Equation (1) (Chen, Chen,
Cheng, and Shevlin 2010).18 We control for pretax profitability (PTROA), the ratio of pretax
income (PI) to lagged total assets because firm-level resources are correlated with both CSR and
tax avoidance (Watson 2015). We also control for size (LNAT) using the natural log of lagged total
assets. FOREIGN is an indicator equaling one if firms report non-missing, non-zero pretax foreign
income (PIFO) and zero otherwise. We include the ratio of intangible assets (INTAN) to lagged
total assets (INTAN) to control for brand equity and firm reputation (Barth, Clement, Foster, and
Kasznik 1998). We control for the tax implications of depreciation (PPE), calculated as the ratio
of property, plant, and equipment (PPEGT) to lagged total assets (AT). We include an indicator
variable (NOL) equaling one when a firm has non-zero, non-missing tax loss carryforward (TLCF)
as well as the change in tax loss carryforward scaled by lagged total assets (NOL). Last, we
control for unconsolidated entities (EQUITY) with the ratio of subsidiary earnings (ESUB) to
Sample Selection
17
We specify additional advantages of our research design over third-party CSR ratings in the Introduction. Further,
most third-party CSR ratings are a “black box” where the researcher has little information on how the rating agency
arrived at their rating; moreover, the vast amount of information necessary for third party ratings creates a processing
delay, making such ratings untimely (Di Giuli and Kostovetsky 2014).
18
Our conclusions do not change when we omit all control variables. We continue to find statistically insignificant
coefficients on POST in both ETR and CETR specifications (p > 0.10). Moreover, the coefficients on POST would
need to change in magnitude by between 78% and 456% to obtain statistical significance. Similarly, our conclusions
do not change when we include control variables at time t+1.
16
services industries in Compustat for the years 1987 to 2010 with assets of at least one million
dollars (147,047 observations). We begin in 1987 because we require cash flow information and
end in 2010 as the last constituency statute (Nebraska) occurs in 2007. We require non-missing
numerators and a strictly positive denominator for our ETR and CETR variables, reducing this
sample to 70,446 observations. Last, we restrict this sample to observations with valid control
variables (except CETR and ETR) at the one percent level to minimize the influence of outliers.
RESULTS
Descriptive Statistics
We present descriptive statistics in Panel A of Table 2. The means of ETR and CETR (0.268
and 0.257, respectively) suggest a moderate level of tax avoidance for the average firm consistent
with prior studies (e.g., Hoi et al. 2013; Watson 2015; Davis et al. 2016). Our other variables have
similarly reasonable descriptive statistics. Approximately 18.5 percent of our observations have
constituency statutes in effect in their incorporation state (POST = 1). Panel B of Table 2 displays
the mean growth rates in ETR and CETR by treatment and POST category. The growth rates of
both variables are statistically different from zero for untreated firms in the pre-period (Column
(1)), while only the CETR growth rates differ from zero within the treatment group in both the pre-
(Column (2)) and post-periods (Column (4)). In Columns (3) and (5), we present univariate tests
of differences in means. The p-values in Column (3) indicate the growth rates in ETR and CETR
19
As discussed in Kennedy (2003), balancing an unbalanced panel is not always advised and can lead to a loss of
efficiency. Nonetheless, we ensure our results are not influenced by changing same composition by re-estimating
Equation (2) over subsamples requiring firms exist for at least 10, 15, 20, and 25 years. Our inferences remain
unchanged.
17
(p = 0.760 and 0.256, respectively). Therefore, we find univariate evidence consistent with parallel
trends. Further, in Column (5) we present p-values pertaining to tests of the mean ΔETR and
ΔCETR for the treatment group in the post-period to the treatment group in the pre-period. These
tests consider whether the growth rates of tax avoidance changed following the enactment of
Panel A of Table 3 contains the results of our primary multivariate analysis. Columns (1)
and (2) contain results where POST is measured at time t and all subsequent years. We find
statistically insignificant coefficient estimates on POST in both columns. Thus, we fail to find
Next, we assess the dynamics of the intention-to-treat effects by adding six indicator
variables—one for two years prior (POSTt-2) and one for the year prior (POSTt-1) to treatment; the
year of treatment (POSTt); one for one and two years after treatment (POSTt+1 and POSTt+2,
respectively) and one for three or more years (POSTt+3). We test for parallel trends with the POSTt-
2 and POSTt-1 terms to verify that trends of our tax avoidance variables did not differ across
treatment and control groups in the period prior to constituency statutes. Coefficients on POSTt+k
our data meet the parallel trends assumption. We also find statistically insignificant coefficient
estimates on POSTt and POSTt+1, suggesting firms do not alter their taxes in response to CSR
shocks. We also find statistically insignificant coefficient estimates on both POSTt+3 coefficients,
18
one statistically significant coefficient estimate on POSTt+2 in the CETR specification (p < 0.10).
However, we note that collectively, any change in cash ETR does not persist given the statistically
insignificant coefficient estimate on POSTt+3. We also emphasize this result does not hold for the
ETR specification and is not robust to entropy balancing, which we discuss below.
We re-estimate Equation (1) including annual POSTt+n terms from year t-20 to t+22. We
then graph the coefficient estimates on POSTt+n in Figure 1 to allow visual assessment of the
parallel trends assumption. We observe volatility in the early and late coefficient estimates on
POST, which is likely attributable to loss of data in the tail years. Nonetheless, the years
surrounding the year of treatment appear largely flat and do not exhibit a discernable pattern.
covariate imbalance (Roberts and Whited 2013). Accordingly, we re-estimate our primary
specification using entropy balancing.20 Specifically, we match the distributions of the treatment
and control firms on the first, second, and third moments of all control variables, and re-estimate
the OLS regressions. We present the results of this analysis in Panel B of Table 3. Across all
specifications, the results lack statistical significance. Altogether, the evidence points to no relation
between constituency statutes and tax avoidance, consistent with firms decoupling CSR from tax
policy. The fact that we find no evidence of this relation using a natural experiment suggests
measurement error and/or specification issues could have influenced prior findings.
20
We decrease the probability that extreme values of ETRs before constituency statutes influence our results with a
two-pronged strategy. First, we re-estimate Equation (1) among firms either above or below the median tax
avoidance prior to the constituency statute. We fail to find significance in either subsample. Second, we entropy
balance on ETR and CETR at time t and re-estimate Equation (1). Our inferences remain unchanged.
19
study to find statistically insignificant results when employing exogenous shocks for identification
(Amihud and Stoyanov 2017; Meghir et al. 2018; Pagalyan 2019; Chen et al. 2016). While it is
impossible prove no association exists, we do not believe our results are due to low power for at
least three reasons. First, Cready et al. (2019) describe how confidence intervals can help overcome
the well-known null hypothesis testing problem wherein a lack of evidence of an effect cannot be
intervals, which we present in Table 3, Panel C. We present our unweighted analysis in Columns
(1) and (2) and our entropy balanced sample in Columns (3) and (4). We present the upper and
lower bounds of the 95 percent confidence interval as percentages of the standard deviations of the
dependent variables. For example, we observe that for the baseline ETR regression, the confidence
interval has a lower bound of -7.38 percent of the standard deviation and an upper bound of 3.86
percent of the standard deviation in Column (1). The CETR confidence interval is similarly narrow,
with bounds at -3.04 percent and 10.63 percent of the standard deviation in Column (2). These
confidence intervals are “narrow enough to reasonably sustain an argument that the set of
evidence-consistent values are effectively indistinguishable from the null hypothesis value”
(Cready et al. 2019).21 The confidence intervals based on firm and year fixed effects or industry-
year fixed effects specifications, presented in Columns (5) through (8), yield similar conclusions.
This analysis yields perhaps the strongest evidence that our lack of results is not due to a lack of
Relatedly, the coefficient estimates on POST are economically trivial, in addition to being
statistically insignificant. In untabulated analysis, we standardize all coefficient estimates and then
21
Cready et al. (2019) note that a confidence interval with an extreme value of 14.8% is sufficiently small to accept
as evidence against a statistically significant association.
20
estimate in the model. In no case is POST the largest coefficient estimate. In fact, the magnitude
of the coefficient estimate on POST averages just 7.4% (5.3%) of the magnitude of the largest
coefficient estimate in the ETR (CETR) specification. Low power would primarily manifest in high
standard errors but not the small coefficient estimates we observe in a reasonably large sample.
Second, we calculate how large an effect would have to be to obtain significant t-statistics.
We present these calculations in Table 3, Panel C. Given our standard errors, the coefficient
estimates on POST in Table 3, Panel A would need to be 0.0157 and 0.0176, respectively, in
Columns (1) and (2) to obtain a t-statistic of 1.96. These magnitudes are 390 percent and 75 percent
larger, respectively, than the effects we document. Our analysis of the entropy balanced sample
yields similar results: coefficients would need to increase by 402% and 717% to 0.0157 and 0.0196
to obtain statistical significance. Such implausibly larger required intention-to-treat effects further
Third, prior studies and our validation tests (described below) demonstrate the enactment
of constituency statutes increases firms’ CSR activities through lowering the expected marginal
cost of CSR (Luoma and Goodstein 1999; Flammer 2018). These studies document effects on
other firm decisions using constituency statutes as exogenous shocks to CSR (e.g., Alexander,
Spivey, and Marr 1997; Flammer and Kacperczyk 2016). These studies suggest our lack of result
is not due to a weak natural experiment but likely due to a lack of association between CSR and
tax avoidance.
Robustness Tests
21
to several logical alternative specifications. First, our main analysis uses firm and headquarters
state-by-year fixed effects to control for time-invariant firm characteristics and location-specific
shocks, respectively. We believe this is a reasonable choice given many aspects of CSR might be
unobservable and tax burdens vary across states. However, it is possible this choice over-controls
for the effect of interest, so we repeat our main analysis using year fixed effects rather than
headquarters state-by-year fixed effects. We present the results in Columns (1) and (2) of Table 4.
Similarly, industry specific shocks are also potentially important determinants of CSR, so we
present these results in Columns (3) and (4) of Table 4. The coefficient estimates on POST continue
Second, we acknowledge that all tax avoidance measures contain noise. To alleviate this
concern, we expand our analysis by including several alternative tax avoidance proxies which are
unlikely to have the same error structure. Further, effective tax rates capture tax avoidance broadly
and do not differentiate between aggressive and benign tax positions. To focus on more aggressive
positions and triangulate our original proxies, we employ discretionary permanent book-tax
differences (DTAX as in Frank, Lynch, and Rego 2009) and a binary variable set equal to 1 for
22
We continue to find narrow confidence intervals. For our year fixed effect specification, we find our scaled
confidence intervals varies from -9.48% to 4.21% for the ETR specification and -4.94% to 8.35% for the CETR
specification. For our industry-by-year fixed effect specifications, we find similarly narrow ranges of -8.78% to
3.16% for the ETR model and -3.80% to 7.98% for the CETR specification.
23
Following Dyreng et al. (2017), we investigate whether firm characteristics produce heterogeneous intention-to-
treat effects to constituency statutes. Specifically, we interact all of our control variables with POST in Equation (1).
In untabulated analysis, we continue to find statistically insignificant coefficients on POST, suggesting firm
characteristics do not alter our primary conclusion. We find a significantly negative interaction between POST and
R&D intensity (p < 0.10) in the ETR specification and a positively significant interaction between POST and
property, plant, and equipment (p < 0.10) in CETR specification.
22
sheltering (SHELTER as in Rego and Wilson (2012)). Both proxies are increasing in tax avoidance.
We present our analyses using these additional proxies in Table 5, Panels A and B. Because we
use several of our control variables in constructing the fitted values that identify SHELTER, we
omit these variables from our vector of control variables so as to not control away the effect of
interest. Again, across both panels, we fail to detect evidence of an association between CSR and
tax avoidance regardless of specification: industry and year fixed effects, firm and state-by-year
fixed effects, firm and year fixed effects, or firm and industry-by-year fixed effects. In untabulated
analysis, we also consider three-year forward-looking GAAP and cash ETRs to mitigate noise in
our main annual measures. We continue to lack significant results using these measures.
Third, consistent with prior research, approximately 58 percent of our sample is legally
source of endogeneity as it facilitates tax avoidance (Dyreng, Lindsey, and Thornock 2013).
Accordingly, we remove Delaware-incorporated firms from our sample and repeat our main
analyses, which we present in Columns (1) and (2) of Table 6, Panel A. We find a similar lack of
Fourth, Cremers, Guernsey, and Sepe (2019) note Texas and Nebraska passed relatively
weak constituency statutes. Moreover, Texas’ constituency statute was phased in over multiple
years. Similarly, Nebraska repealed an existing constituency statute in 1995 and then re-enacted it
in 2007. Given these statutes are less stringent and could have been anticipated, including them in
our analysis could cloud inferences (Flammer 2018). Accordingly, we re-estimate our main
24
Along similar lines, we also re-estimate Equation (1) over a subsample of firms that are incorporated and
headquartered in different states. Our inferences remain unchanged.
23
analysis in Columns (3) and (4) of Table 6, Panel A. We again fail to find evidence of a significant
intention-to-treat effect.
Fifth, we isolate the two constituency statutes Flammer (2018) identifies as the most
stringent: Maryland and North Carolina. We would expect to find the strongest intention-to-treat
effect for firms incorporated in these two states. We present two sets of analyses in Table 6, Panel
B. In the first two columns, we include all other states as controls. In the last two columns, we
compare Maryland and North Carolina only against states that have not passed constituency
conclude covariate imbalance, alternative fixed effect structures, and different treatments do not
tax avoidance, we have not yet distinguished among firms most likely to be affected by
constituency statutes. Using prior literature, we identify industry groups which theory predicts will
be more responsive to CSR shocks and estimate Equation (1) over the relevant subsample.
Brammer and Millington (2005) identify pharmaceutical, alcoholic beverage, and defense industry
firms as socially sensitive due to their high levels of social exposure. Similarly, Cho and Patten
(2007) identify oil exploration, paper, chemical and allied products, petroleum refining, metals,
mining, and utilities industries as environmentally sensitive. Michelon, Patten, and Romi (2019)
predict firms in environmentally and socially sensitive industries (ESSI) face greater stakeholder
pressure over CSR. As a result, we expect these firms to be more responsive to exogenous shocks
24
evidence of a negative and significant coefficient on POST in the CETR specification. However,
this coefficient estimate (β = -0.0348) is implausibly large, suggesting the cash effective tax rates
of ESSI firms decreased by 3.48 percentage points following the enactment of constituency
statutes. Moreover, we note this model suffers from a violation in parallel trends. Specifically, we
find negative and statistically significant coefficients on POSTt-1 and POSTt-2 in Column (4). This
violation of the parallel trends assumption suggests firms in ESSI industries began decreasing
Curious to learn more about the statistically significant coefficient estimates in Table 7, we
perform Monte Carlo simulation to consider the probability that the statistically significant
coefficient estimate on POST in Column (2) could occur randomly. We have 30 3-digit SIC
industries in our ESSI sample. From our sample of non-ESSI industries, we randomly assign 30
3-digit SIC industries as a placebo and then re-estimate the regression model 1,000 times. The
coefficient estimate on POST in Column (2) is smaller than 102 of the 1,000 coefficient estimates,
implying a p-value of 0.102. Thus, consistent with the violation of parallel trends, a random
process can generate a significant coefficient. Altogether, even in a sample of firms that are highly
sensitive to CSR shocks, the implausibly large coefficient estimate, the violation of parallel trends,
and the results of the Monte Carlo simulation all indicate the evidence of an association between
Instrumental Variables
25
and Mogstad 2015). The validity of this assumption is unclear in our setting as practitioners
(Sindreu and Kent 2019), regulators (Peirce 2019), and researchers (Chatterji et al. 2016;
Dorfleitner, Halbritter, and Nguyen 2015; Raghunandan and Rajgopal 2020) all criticize how CSR
scores measure CSR activities.25 Nonetheless, the validation test helps ensure our primary research
design using constituency statutes captures significant changes in CSR activity and, in turn, helps
to address the joint hypothesis problem. In the first stage of our instrumental variables approach,
we regress third-party CSR scores on the enactment of constituency statutes, control variables, and
fixed effects. As such, it is a validation test. Following Ni (2020) and Flammer and Kacperczyk
(2016), we use total strengths from MSCI to form the first-stage dependent variable MSCI. We
present the results of this analysis in Table 8. We find a significantly positive coefficient estimate
on POST, consistent with firms increasing CSR activity following enactment of constituency
statutes. In the second stage, we use constituency statutes to instrument for the exogenous shift in
CSR activity following enactment of constituency statutes. Across both ETR and CETR
specifications, we fail to find evidence that the increased CSR activity around the enactment of
constituency statutes impacts tax avoidance. In showing constituency statutes do affect CSR
activity and in instrumenting the exogenous change in CSR activity, this test helps corroborate that
our results are indeed a product of decoupling of CSR from tax avoidance, rather than a artefact of
a joint hypothesis.
25
These criticisms are particularly salient in our setting. If the aforementioned criticisms are valid, then the best case
scenario is that CSR scores are a noisy proxy for CSR activities. However, the portion of CSR activities not captured
by CSR scores should still influence tax avoidance. Therefore, even in a best case scenario, our IV analysis is
arguably biased against finding a result. We caution against over-reliance on the IV analysis, since we believe we
lack a valid proxy for treatment (rather than assignment) and because the exclusion restriction is likely violated.
26
We further investigate the extent to which the exogenous reductions in CSR costs caused
by constituency statutes result in increased CSR activities. While such a concern contrasts with
legal research confirming the validity of these statutes (Geczy et al. 2015) and prior studies
demonstrating firms’ responses to constituency statutes (e.g., Luoma and Goodstein 1999),
constituency statutes may not represent shocks to CSR activity in our sample for some unknown
reason. We address this concern by examining changes in non-tax CSR activity among our sample
firms. We consider the extent to which constituency statutes affect firms’ CSR activity along two
dimensions: (1) third-party CSR ratings provided by Thomson Reuters ASSET4 and (2) toxic
activity on constituency statutes and control variables, clustering standard errors by state of
incorporation. We include firm and year fixed effects to control for firm- and year-specific factors
First, we expect that if constituency statutes have a legitimate effect on corporate decision-
making, firms should, on average, engage in more CSR activity following their enactment.
Therefore, while acknowledging the deficiencies and inconsistencies in third-party CSR ratings,
we expect third-party CSR ratings to increase following the enactment of constituency statutes.26
We use Thomson Reuters’ ASSET4 net CSR rating (ASSET4) and controversy score (CONTROV)
Second, CSR encourages firms to internalize the social costs of pollution and curtail toxic
emissions (King and Lenox 2002). Constituency statutes explicitly allow firms to consider the
26
We recognize the irony in using third-party CSR ratings as a validation test. Our intent is merely to determine
whether constituency statutes are positively related to proxies for CSR-related outcomes. We caution the reader not
to over-rely on third-party CSR ratings.
27
emissions following constituency statutes. TOXIC is the natural logarithm of the total pounds of
the firm’s toxic emissions, obtained from the EPA’s Toxic Release Inventory.27
Following Chatterji, Levine, and Toffel (2009), we include the following control variables:
ROA, return on assets; LNAT, the natural logarithm of total assets; PPE, property, plant, &
equipment; MTB, market-to-book ratio; LEV, leverage; and R&D, research and development
in the ASSET4 (controversy and toxic emissions) specification, consistent with firms being more
attentive to the needs of stakeholders and the environment following enactment of constituency
statutes.
coefficient estimate on POST in the ASSET4 (CONTROV and TOXIC) specification.29 These
results suggest within our sample, firms respond to constituency statutes with increased CSR
activities. Constituency statutes appear to increase CSR activities broadly and specifically reduce
CSR controversies and toxic emissions. We emphasize that while we perform this analysis on a
subset of our primary sample, conclusions from this analysis remain informative. Specifically, if
low power is a concern in our broader setting, then our ability to detect a result in a narrower
setting, where changes are arguably costlier in nature, implies sufficient power to detect shifts in
27
Toxic Release Inventory (TRI) data can be found on the EPA website (https://www.epa.gov/toxics-release-
inventory-tri-program/tri-basic-data-files-calendar-years-1987-2015) and has been widely used in research (e.g., King
and Lenox 2000, 2002). We aggregate all emissions of all chemicals by all facilities to a single parent-year observation.
We then merge onto our sample using Dun & Bradstreet number. We note a high level of sample attrition. Not all
industries must report their emissions to the EPA. Further, only firms processing or consuming 25,000 and 10,000
pounds of emissions, respectively and employing ten or more employees must report.
28
Full variable definitions are available in Appendix B.
29
In further untabulated analysis, we also find significant increases in ASSET4’s environmental, social, and
governance pillars. When we disaggregate ASSET4’s CSR score into its most granular components, we find significant
increases in the resource use, emissions, workforce, human rights, community, product responsibility, shareholders,
and CSR strategy categories.
28
indicate constituency statutes are indeed a valid shock to CSR activity in our sample.
CONCLUSION
marginal cost of CSR to examine the relation between CSR and tax avoidance. Research in other
disciplines has validated the constituency statute methodology, showing the statutes affect many
firm policies (Alexander et al. 1997; Luoma and Goodstein 1999; Geczy et al. 2015; Flammer and
Kacperczyk 2016; Flammer 2018). Using this intention-to-treat approach, we find no evidence of
a relation between CSR and tax avoidance despite narrow confidence intervals. Moreover, we fail
to find an association within a subsample of firms which theory predicts should be the most
responsive to shocks to their marginal cost of CSR. Meanwhile, we find evidence that constituency
statutes prompt firms to alter their non-reporting strategies, resulting in higher CSR ratings and
Our study advances the literatures on CSR and tax avoidance. Prior research on the
existence and direction of the relation between CSR and tax avoidance contains theory and
evidence in both directions, leaving the question unresolved. Leveraging a stringent research
design common in management research, our study offers credible new evidence on this popular
research question. In doing so, we respond to the call of Huang and Watson (2015) to improve
research design and, by extension, the credibility of CSR research in accounting. We also build
upon the vast literature on tax avoidance as one of the first studies to suggest a non-determinant
of tax avoidance amid a plethora of studies offering determinants, thereby responding to the call
29
a lack of evidence of the relation between CSR and tax avoidance, we cannot state conclusively
that no relation exists. Our battery of tests might fail to detect an existing relation. Further, we
cannot claim CSR never affects tax avoidance for certain firms, although we do examine specific
subsamples of firms in which theory predicts decoupling to be least likely. Future theory could
identify other relevant subsamples in which a relation exists. Even considering these limitations,
30
31
33
35
36
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37
38
39
40
41
Graph of β (POST)
0.4
0.3
0.2
0.1
0
t-20 t-18 t-16 t-14 t-12 t-10 t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 t+20 t+22
-0.1
-0.2
-0.3
-0.4
This graph presents the coefficient estimates by year on POSTt+n from multivariate regressions of
tax avoidance on the enactment of constituency statutes as in Equation (1). The dependent
variables are ETRt+1 (black line) and CETRt+1 (gray line). None of the coefficient estimates
obtain statistical significance.
42
State Year
Idaho 1988
Louisiana 1988
Tennessee 1988
Virginia 1988
Florida 1989
Georgia 1989
Hawaii 1989
Indiana 1989
Iowa 1989
Kentucky 1989
Massachusetts 1989
Missouri 1989
New Jersey 1989
Oregon 1989
Mississippi 1990
Pennsylvania 1990
Rhode Island 1990
South Dakota 1990
Wyoming 1990
Nevada 1991
North Carolina 1993
North Dakota 1993
Connecticut 1997
Vermont 1998
Maryland 1999
Texas 2006
Nebraska 2007*
This table contains the list of states we use in our sample along with the year
in which they enacted a constituency statute.
*Nebraska repealed an existing constituency statute in 1995, then enacted one in 2007.
43
Table 2
Panel B: Dependent variable growth rates
Column: (1) (2) (3) (4) (5)
POST = 0 (1) vs (2) POST = 1 (1) vs (4)
Variable TREAT = 0 TREAT = 1 p-value TREAT = 1 p-value
ΔETR -0.0051*** -0.0066 (0.760) -0.0027 (0.470)
N 40,939 2,542 10,049
ΔCETR 0.0189*** 0.0259*** (0.256) 0.0144*** (0.140)
N 38,792 1,947 9,913
The p-values in column 3 compare treated observations with untreated observations all within the pre-
period. The p-values in column 5 compare treated observations in the post-period with untreated
observations in the pre-period. *, **, and *** indicate statistical significance at p < 0.10, 0.05, and 0.01
respectively.
44
45
46
Coefficient estimate on POST -0.0054 0.0101 -0.0052 0.0024 -0.0074 0.0047 -0.0080 0.0058
upper bound of confidence int. 0.011 0.028 0.011 0.023 0.012 0.022 0.009 0.021
lower bound of confidence int. -0.021 -0.008 -0.021 -0.018 -0.027 -0.013 -0.025 -0.010
standard deviation of dep. var. 0.2847 0.2633 0.2847 0.2633 0.2847 0.2633 0.2847 0.2633
CI upper bound as % of std. dev. 3.86% 10.63% 3.86% 8.73% 4.21% 8.35% 3.16% 7.98%
CI lower bound as % of std. dev. -7.38% -3.04% -7.38% -6.84% -9.48% -4.94% -8.78% -3.80%
std. error of coeff. est. on POST 0.008 0.009 0.008 0.010 0.010 0.009 0.009 0.008
t -stat needed for p < 0.05 1.96 1.96 1.96 1.96 1.96 1.96 1.96 1.96
+ coefficient required 0.0157 0.0176 0.0157 0.0196 0.0196 0.0176 0.0176 0.0157
% larger than our estimate -390% 75% -402% 717% -365% 275% -321% 170%
- coefficient required -0.0157 -0.0176 -0.0157 -0.0196 -0.0196 -0.0176 -0.0176 -0.0157
% larger than our estimate 190% -275% 202% -917% 165% -475% 121% -370%
This panel presents information on 95% confidence intervals around our coefficient estimates on POST from Panels
A and B of Table 3, as well as Table 4. Following Cready et al. (2019), we compare the confidence intervals to the
standard deviations of the dependent variables to assess the width of the confidence intervals. We also compute and
display the hypothetical magnitudes of positive and negative coefficient estimates that would be required to obtain
statistical significance, and show how these compare as percentages of our observed coefficient estimates. Negative
signs in the percentage rows indicate opposite direction.
47
Fixed Effects Firm, Year Firm, Year Firm, Ind-Yr Firm, Ind-Yr
Observations 59,839 59,839 59,839 59,839
R2 0.274 0.326 0.292 0.342
This table presents results of OLS regressions of tax avoidance proxies on indicator variables pertaining to the
enactment of constituency statutes and control variables. Firm and year fixed effects are included in columns (1) and
(2), and firm and industry-year fixed effects are included in columns (3) and (4). Variable definitions found in
Appendix B. Two-tailed p-values in parentheses are calculated using robust standard errors clustered by state of
incorporation. *,**, and *** indicate statistical significance at p<0.10, 0.05, and 0.01 respectively.
48
TREAT 0.0012
(0.452)
POST 0.0003 -0.0011 0.0012 0.0016
(0.921) (0.626) (0.618) (0.532)
PTROA 0.0136*** -0.0459*** -0.0451*** -0.0467***
(0.000) (0.000) (0.000) (0.000)
LNAT -0.0009 0.0093*** 0.0089*** 0.0096***
(0.393) (0.000) (0.001) (0.000)
FOREIGN 0.0022*** -0.0010 -0.0008 -0.0021
(0.001) (0.534) (0.639) (0.274)
INTAN 0.0088** -0.0343*** -0.0335*** -0.0323***
(0.039) (0.000) (0.000) (0.000)
PPE 0.0025 0.0165** 0.0169** 0.0164**
(0.309) (0.024) (0.023) (0.019)
NOL 0.0129*** -0.0034** -0.0029* -0.0037**
(0.000) (0.030) (0.054) (0.011)
ΔNOL -0.0083** -0.0196*** -0.0202*** -0.0202***
(0.028) (0.000) (0.000) (0.000)
MTB -0.0017*** -0.0006 -0.0006 -0.0004
(0.000) (0.136) (0.139) (0.311)
LEV 0.0011 0.0030 0.0029 0.0026
(0.761) (0.621) (0.654) (0.676)
R&D 0.0160* 0.2751*** 0.2755*** 0.2671***
(0.069) (0.000) (0.000) (0.000)
EQUITY -1.0189*** -1.0176*** -1.0064*** -0.9827***
(0.000) (0.000) (0.000) (0.000)
This table presents results of OLS regressions of tax avoidance on an indicator variable pertaining to the
enactment of constituency statutes and control variables. Fixed effects are included as listed. Variable
definitions found in Appendix B. Two-tailed p-values in parentheses are calculated using robust standard
errors clustered by state of incorporation. *,**, and *** indicate statistical significance at p<0.10, 0.05, and
0.01 respectively.
49
SHELTER t+1
(1) (2) (3) (4) (5) (6) (7) (8)
VARIABLES Lisowsky Wilson Lisowsky Wilson Lisowsky Wilson Lisowsky Wilson
Fixed Effects Ind, Yr Ind, Yr Firm, State-Yr Firm, State-Yr Firm, Yr Firm, Yr Firm, Ind-Yr Firm, Ind-Yr
Observations 115,542 56,506 115,542 56,506 115,542 56,506 115,542 56,506
2
R 0.071 0.104 0.534 0.765 0.526 0.761 0.535 0.767
This table presents results of OLS regressions of tax avoidance on an indicator variable pertaining to the
enactment of constituency statutes and control variables. The dependent variable is a binary variable set
equal to 1 for firms in the highest quintile of predicted tax shelter likelihood using the model from Lisowsky
(2010) in the odd-numbered columns and using the model from Wilson (2009) in the even-numbered
columns. Fixed effects are included as listed. Variable definitions found in Appendix B. Two-tailed p-
values in parentheses are calculated using robust standard errors clustered by state of incorporation. *,**,
and *** indicate statistical significance at p<0.10, 0.05, and 0.01 respectively.
50
51
52
53
POST 0.3997**
(0.014)
MSCI -0.0403 0.0015
(0.760) (0.988)
PTROA 0.5203*** 0.0571* 0.3141***
(0.000) (0.058) (0.000)
LNAT 0.7168*** 0.0252 0.0599***
(0.000) (0.113) (0.000)
FOREIGN 0.0230 0.0089 0.0025
(0.648) (0.707) (0.907)
INTAN 0.0654 -0.0192 0.0423***
(0.495) (0.518) (0.003)
PPE -1.4584*** -0.0850 -0.0759
(0.000) (0.405) (0.268)
NOL 0.0831** -0.0118 -0.0145
(0.027) (0.408) (0.331)
ΔNOL -0.1504 -0.0544 -0.0528***
(0.329) (0.122) (0.003)
MTB -0.0177*** 0.0004 -0.0018
(0.000) (0.829) (0.307)
LEV 0.3287*** 0.0280 -0.0099
(0.001) (0.364) (0.721)
R&D 1.9246*** -0.2610*** 0.3788**
(0.006) (0.001) (0.014)
EQUITY 18.4062*** 1.0979 0.2612
(0.000) (0.404) (0.779)
This table presents results of instrumental variables analysis. Column 1 contains results of the first stage regression of
MSCI CSR strengths (MSCI) on POST. Columns 2 and 3 contain results of the second stage regressions of ETR or
CETR on the exogenous component of MSCI. Control variables and firm and year fixed effects are included. Variable
definitions found in Appendix B. Two-tailed p-values in parentheses are calculated using robust standard errors
clustered by state of incorporation. *,**, and *** indicate statistical significance at p<0.10, 0.05, and 0.01 respectively.
54