Corporate social responsibility of U.S.‐listed firms headquartered in tax havens

• DOI: http://doi.org/10.1002/smj.3195
• Date: 01 September 2020
• Author: Dongyoung Lee
• Published date: 01 September 2020

RESEARCH NOTES

Corporate social responsibility of U.S.-listed

firms headquartered in tax havens

Dongyoung Lee

Desautels Faculty of Management, McGill University, Montreal, Quebec, Canada

Correspondence

Dongyoung Lee, Desautels Faculty of

Management, McGill University, 1001

Sherbrooke St. West, Montreal, Quebec

H3A 1G5, Canada.

Email: dongyoung.lee@mcgill.ca

Funding information

McGill University

Abstract

Research Summary: Using 138 firm-year observations

for 46 U.S.-listed firms headquartered in tax havens from

2004 to 2013, this study employs a matched-sample

design and documents that the level of corporate social

responsibility (CSR) engagement is relatively lower for

firms with tax haven headquarters (HQ) than for those

with U.S. HQ. This result is robust to the use of firm phi-

lanthropy as a measure of CSR engagement and holds

true in an environment with high CSR expectations from

U.S. communities. In an alternative setting of HQ reloca-

tions within the United States, we use a difference-in-

differences methodology and find that when firms move

their HQ to states with lower corporate income taxes,

they decrease the level of CSR engagement. Overall find-

ings are consistent with corporate culture theory.

Managerial Summary: This article examines CSR

engagement of U.S.-listed firms headquartered in tax

havens. Using data from 2004 to 2013, we find that

firms with tax haven HQ exhibit a relatively lower level

of CSR engagement than otherwise similar firms

headquartered in the United States. In the same vein,

tax-haven-headquartered firms tend to give less to char-

ity, even when they face high CSR expectations from U.

S. communities. In an alternative setting of HQ reloca-

tions within the United States, we document that the

level of corporate social engagement is more likely to

drop for firms that move their HQ to lower-tax regions.

Received: 5 June 2017 Revised: 9 December 2019 Accepted: 9 March 2020 Published on: 23 June 2020

DOI: 10.1002/smj.3195

Strat Mgmt J. 2020;41:1547–1571. wileyonlinelibrary.com/journal/smj © 2020 John Wiley & Sons, Ltd. 1547

We interpret our findings as evidence of corporate cul-

ture affecting both the tax avoidance and CSR activities

of firms headquartered in tax havens.

KEYWORDS

corporate culture, corporate philanthropy, corporate social

responsibility, offshore corporate headquarters, tax haven

1|INTRODUCTION

This study examines the level of corporate social responsibility (CSR) engagement of U.S.-listed

firms headquartered in tax havens. Building on risk management theory, some scholars view

CSR as a form of reputation insurance (Godfrey, 2005; Godfrey, Merrill, & Hansen, 2009; Kang,

Kim, & Lee, 2017). According to this view, firms with tax haven headquarters (HQ) have eco-

nomic incentives to pursue CSR activities in the face of public outcries over tax avoidance.

Empirical studies find that CSR engagement grants “insurance-like”benefits that help alleviate

adverse market reactions when firms suffer from negative events (Koh, Qian, & Wang, 2014;

Shiu & Yang, 2017). Other studies provide evidence that CSR can help firms curry favor with

local stakeholders, including regulators. For example, Hong and Liskovich (2016) and Jef-

fers (2015) find that more socially responsible firms pay lower penalties for violating U.S. gov-

ernment regulations. In particular, Crilly, Ni, and Jiang's (2016) field experiment shows that if

foreign-headquartered firms commit to proactive CSR engagement in the United States, they

can induce positive impressions from U.S.-based nongovernmental organizations. This line of

research implies that firms with tax haven HQ may use CSR activities to help protect their repu-

tations and/or to garner favorable responses from U.S. regulators and other local stakeholders.

By contrast, research drawing on corporate culture theory makes the opposite prediction,

positing that CSR stems from a prevailing culture that cares about nonfinancial stakeholders

(Hoi, Wu, & Zhang, 2013). A firm may have a culture that considers CSR a waste of corporate

resources, with little impact on firm value, consistent with Friedman's (1970: 33) well-known

statement that “the social responsibility of business is to increase its profits”for the benefits of

shareholders. Corporate culture refers to shared beliefs and values about the “right”course of

action among firm members (Hermalin, 2001; Kreps, 1990), and it affects a wide range of firm

decisions (Graham, Grennan, Harvey, & Rajgopal, 2018). Under the cultural perspective, CSR is

regarded as an inherent attribute of the firm (Hoi et al., 2013). In line with this idea, studies find

evidence of commonality across corporate policies, involving tax and CSR. For example, Frank,

Lynch, and Rego (2009) document that tax reporting aggressiveness tends to accompany finan-

cial reporting aggressiveness, using a sample of U.S. firms. Lanis and Richardson (2012) find

that Australian firms that adopt aggressive tax avoidance policies are less likely to publicly dis-

close CSR-related information. Hoi et al. (2013) also find that when U.S. firms engage in socially

irresponsible activities, they tend to avoid taxes, suggesting that both CSR and tax policies origi-

nate from a common culture of dismissing the interests of nonfinancial stakeholders. In such a

culture, the firm will not contribute to society through either tax payments or discretionary

expenditures, such as charitable donations.

This research aims to contribute to the scholarly debate over different views on CSR by

examining the unique setting of U.S.-listed firms headquartered in tax havens.

1

Tax haven

reincorporation is the most extreme and highly publicized form of tax avoidance, attracting

1548 LEE