Inger, Kerry Katharine and Vansant, Brian, Market Valuation of Tax Avoidance and Corporate Social Responsibility: Does the Market Discount Corporate Robin Hoods? (January 4, 2016). Available for download at SSRN: http://ssrn.com/abstract=2727952

This study examines whether market valuation of firms’ tax avoidance is tempered by the extent firms engage in Corporate Social Responsibility (CSR) activities. Prior studies document that investors positively value tax avoidance. The rationale for this finding is that tax avoidance provides cash savings that can be used by firm managers to generate future shareholder wealth. Prior studies also show that investors’ valuations are sensitive to the risk of future negative tax outcomes. Assuming that many types of CSR activities are low risk, low yielding uses of firm resources, we posit that higher levels of CSR activities may signal to investors that cash generated via tax avoidance has not been (or will not be) fully used to generate a return sufficient to offset the risk associated with aggressive tax planning strategies. Consistent with this argument, we predict and find that the positive association between market value and tax avoidance is significantly weakened when firms have higher positive levels of CSR activity. Further, we predict and find that ‘philanthropic’ types of CSR activities in particular are associated with investor discounting of tax avoidance. We interpret our results as suggesting the equity market views CSR activities to be ostensibly funded through cash savings generated via tax avoidance.”