Corporate social responsibility and tax avoidance: Channeling effect of family firms

• Published date: 01 July 2023
• Author: Deniz Özbay,Hümeyra Adıgüzel,Mehpare Karahan Gökmen
• Date: 01 July 2023
• DOI: http://doi.org/10.1002/jcaf.22610

Received:  February Revised:  November Accepted:  December 

DOI: ./jcaf.

RESEARCH ARTICLE

Corporate social responsibility and tax avoidance:

Channeling effect of family firms

Deniz Özbay1Hümeyra Adıgüzel2Mehpare Karahan Gökmen3

Faculty of Business and Management

Sciences, Maltepe University, İstanbul,

Turkey

Faculty of Economics, Administrative

and Social Sciences, Bahçeehir

University, İstanbul, Turkey

Faculty of Economics and

Administrative Sciences, Ondokuz Mayıs

University, Samsun, Turkey

Correspondence

Adıgüzel, Hümeyra. Bahçeehir

University, Facultyof Economics,

Administrative and Social Sciences,

İstanbul Turkey.

Email: humeyra.adiguzel@eas.bau.edu.tr

Abstract

Although the relationship between tax avoidance and corporate social respon-

sibility has been the subject of many studies, results have been inconclusive. In

this study, we investigate this relationship from the agency perspective of fam-

ily firms. Using  firm-year observations from  firms listed on the Istanbul

Stock exchange, we found that socially responsible non-family firms engage in

tax avoidance activities through discretionary book-tax differences rather than

tax avoidance through aggressivetax planning and tax sheltering, and this behav-

ior is opposite in family firms. According to findings, family firms engage in more

aggressive tax planning than non-family firms. This study also provides evidence

about the external effects on the relationship between CSR and tax avoidance

when family firms are monitored effectively by institutional investors or debtors.

More specifically, external monitoring by institutional investors or debtors only

affects the tax avoidance behaviors of non-family firms.

KEYWORDS

ethics, family firms, risk management, social responsibility, tax avoidance

1 INTRODUCTION

Taxes are one of the most significant cost figures for com-

panies owing to its major impacts on profitability and

financial performance. Hence, companies are keen to fol-

low tax strategies that minimize their tax payments. While

some strategies are categorized as illegal (e.g., tax evasion),

others fall within legislative limits (e.g., tax planning, tax

avoidance). Taxavoidance can be defined as “anything that

reduces the firms’ taxes relative to its pre-tax accounting

income” (Dyreng et al., ). Yet, although tax avoid-

ance is described as legal, its ethical aspect is debatable

(Stephenson and Vracheva, ) because companies can

avoid paying their fair amount of taxes within the bound-

aries of law.Instead, they are using the “gray areas” within

tax legislation (Blouin, ). “Gray areas” within tax leg-

islation are opportunistically used by companies under tax

avoidance (Blouin, ).

When tax avoidance strategies are within legal bound-

aries, consequences of tax avoidance do not levy any

marginal (macroeconomic or social) negative impact.

However, tax avoidance is not “socially acceptable” when

it deepens the increase in marginal social costs (Konukcu

Önal, ). Therefore, tax avoidance strategies both have

benefits and costs. It can be a significant financial resource

for companies. But also, unacceptable tax avoidance strate-

gies, that inequitably decrease tax payments, can have

negative consequences, such as penalties, litigations costs,

or reputational damage. At this point, companies may

use Corporate Social Responsibility (CSR) projects as a

masking tool if they are unwilling to pay a fair amount

of their taxes while avoiding reputational damage. This

positive association between CSR and tax avoidance can

be explained by “risk management theory” (Col and

Patel, ), which suggests that CSR projects are a

risk-minimizing tool for risky corporate actions.

J Corp Account Finance. ;:–. ©  Wiley Periodicals LLC.11wileyonlinelibrary.com/journal/jcaf

12 ÖZBAY .

Besides the theory explained above, there is another

theory explaining the relationship between CSR and tax

avoidance; namely, “corporate culture theory”. This the-

ory suggests that companies’ CSR performance reflects a

good balance between their economic, social, and environ-

mental concerns, which may prevent them fulfilling their

tax obligations (Col and Patel, ). This theory predicts a

negative association between CSR and tax avoidance.

Although many studies have addressed this relation-

ship, the results have been inconclusive. The presentstudy

therefore aimed to the relationship with the intermedi-

ating effect of family firms. Previous studies that have

analyzed tax avoidance adopt the agency theory as the

main reference theoretical stream (Flamini, ). The

agency perspective of family firms on the subject stands

out as a sound research question.

Family firm studies are mostly grounded in agency

theory, which explains the conflict of interest between

management and shareholders, or majority and minority

shareholders. Having sufficient influence on management

as shareholders, family firms are expected to exhibit the

second type of agency problem. Family members are likely

to extract benefit at the expense of minority sharehold-

ers (Cheng, ). Thus, tax avoidance provides monetary

sources that can be expropriated by the controlling family.

However, it should be noted that family firms use

these strategies at the risk of reputational or any other

damage related to their family members. Firms that con-

sider this risk to be high are unwilling to minimize

their tax payments through tax avoidance. Family firms

differ from non-family firms in their financial decision-

making (Landry et al., ) Family firms contemplate

non-economic factors more, such as reputation, identity,

and longevity. This can be explained in terms of the socio-

emotional wealth (SEW) view, which predicts that family

firms avoid riskydecisions like tax avoidance that can dam-

age the firm’s image (Gomez-Mejia et al., ). Moreover,

reputational concerns are predicted to increase their CSR

engagement.

In this study, we aim to shed light on the relation-

ship between tax avoidance and CSR for a sample of

family firms. As the majority shareholders, family mem-

bers can benefit financially through a family firm’s tax

avoidance strategies while using CSR projects to minimize

risk. On the other hand, the SEW view predicts that their

greater reputational sensitivity means that family firms are

more socially responsible and avoid risky actions like tax

avoidance.

This study contributes to the literature in several ways.

Firstly, most previous studies on this subject have been

conducted in the United States or European countries that

are well-known for their legal enforcement and institu-

tional strength. In contrast, we investigate the relationship

between tax avoidance and CSR for family firms in Turkey,

which is a developing country with a weaker legal and

institutional structure. Secondly,the study draws attention

on the agency perspective regarding family firms. And our

study contributes specifically to the growing body of liter-

ature on family firms. According to the study conducted

by Ernst and Young () stated that % of companies

operating in Turkey can be defined as family controlled

and their importance can be understood better know-

ing that % of companies in Turkey are medium and

small sized enterprises. Demirbag et al. () also points

out that national family companies are predominant in

Turkey; in comparison to MNEs and even listed compa-

nies are controlled by a family-owned holding company.

Highly collectivist culture in Turkey(Hof and Hotut, )

intensifies their social and economic role (Cetin, ).

Lastly, literature on tax avoidance and family firms indi-

cates that more aggressive tax avoidance strategies can be

chosen by family firms in environments that are charac-

terized as opaque, with weak auditing and institutional

infrastructure (Lee and Bose, ; Khelil and Khlif, ).

2LITERATURE REVIEW

2.1 Corporate social responsibility and

tax avoidance

The academic literature disagrees on the relationship

between CSR and tax avoidance. While some studies find

a negative association, some others suggest it is positive.

An important reason for this disagreement is the definition

of CSR. While some researchers define it in ethical terms

(Mintzberg, ; Moore, ), others handle it strategi-

cally (Carroll, ;Lantos,). Carroll () separated

CSR into four categories of responsibility: economic, legal,

ethical, and discretionary. Carroll later improvedthis CSR

classification by explaining CSR dynamics through the

CSR pyramid, which emphasizes that economic responsi-

bilities are a major part of CSR (Carroll, ). In , the

European Commission proposed a new definition of CSR

in to reflect that the growing power and expanded borders

of enterprises due to globalization had in turn changed

society’s expectations of them. The commission describes

CSR as “the responsibility of enterprises for their impacts

on society”, and suggests that “enterprises should have in

place a process to integrate social, environmental, ethical,

human rights and consumer concerns into their business

operations and core strategy in close collaboration with

their stakeholders .. . to fully meet their corporate social

responsibility” (European Commission, ).