Does social capital constrain firm’s tax avoidance?

Abstract

We investigate whether social capital affects tax avoidance activities. Using a sample of 52,962 firm-year observations over the 1990-2014 period, we document that social capital is significantly and negatively associated with tax avoidance. Specifically, we find that higher social capital reduces the propensity to undertake tax sheltering activities. This result is robust to using different proxies for tax avoidance as well as to including controls for CEO characteristics, and quality of corporate governance. Our evidence is consistent with the idea that: i) managers regard corporate tax payments as a socially responsible action and ii) the social environment in which firms operate affects corporate decisions.