Read the article:Zeng, T. (2016). Corporate Social Responsibility, Tax Aggressiveness, and Firm Market Value.Accounting Perspectives,15(1), 7-30. doi:10.1111/1911-3838.12090

Does Corporate Social Responsibility ultimately increase company profits?

Corporate Social Responsibility, Tax Aggressiveness, and Firm Market Value* TAO ZENG, Wilfrid Laurier University Received on August 27, 2013; editorial decision completed on March 9, 2015 ABSTRACT This paper examines the relationship of corporate social responsibility (CSR), tax aggressiveness, and firm market value. An economic model has been developed to show that profit-maximization firms are willing to incur additional costs in CSR, such as paying more taxes, as long as they can differentiate their products from non-CSR firms, and that socially conscious consumers will buy products from CSR firms at prices higher than those of non-CSR firms. The empirical study in this paper indicates that the higher the CSR ranking of a firm, the less likely a firm is to engage in tax aggressiveness. It also indicates that a reputation of higher CSR will enhance firm market value. Using Canadian companies listed in the S&P/TSX 60 index, I find that both firms' five-year effective tax rates and annual effective tax rates are positively associated with their overall CSR scores as well as with their social scores. Firms' five-year effective tax rates are also positively asso- ciated with their governance index. I also find that firms' overall CSR ranking and governance scores are positively associated with their market value. Keywords Corporate social responsibility; Effective tax rate; Firm market value; Tax aggressiveness RESUME L'auteur examine la relation entre la responsability sociale de l'entreprise (RSE), l'audace de ses positions fiscales et sa valeur de marche. Il elabore un modele econo- mique montrant que les entreprises qui cherchent a maximiser leurs profits sont disposees a engager des couts additionnels lies a la RSE, notamment a payer davantage d'impots, dans la mesure ou elles pourront ainsi differencer leurs pro- duits de ceux des entreprises qui ne se soucient pas de la RSE, et que les consom- mateurs qui attachent de l'importance a la RSE accepteront d'acheter les produits des entreprises qui sont socialement responsables a des prix superieurs a ceux des entreprises qui ne le sont pas. L'etude empirique de l'auteur revele que plus le classe- ment d'une entreprise est eleve en ce qui a trait a la responsability sociale, moins cette derniere est susceptible d'user d'audace dans ses positions fiscales. Elle revele egalement qu'une bonne reputation en matiere de responsability sociale accroit la valeur de marche de l'entreprise. L'etude des societes canadiennes de l'indice S&P TSX 60 permet de constater que les taux d'imposition effectifs des entreprises sur * The author gratefully acknowledges the financial support for this research was received from WLU/ CA Research Centre. The author thanks two anonymous reviewers and Claude Laurin, the Editor, for their insightful comments and suggestions. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016) pages 7-30 @ CAAA/ACPC doi:10.1111/1911-3838.120908 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES une periode cing ans, de meme que leurs taux d'imposition effectifs annuels, sont en relation positive avec leur cote globale en matiere de RSE et leur cote au chapitre du comportement social. Leurs taux d'imposition effectifs quinquennaux sont aussi en relation positive avec leur indice de gouvernance. L'auteur observe egalement que le classement global des entreprises en matiere de RSE et leur cote au chapitre de la gouvernance sont en relation positive avec leur valeur de marche. Mots cles : Audace des positions fiscales, responsability sociale de l'entreprise, taux d'imposition effectif, valeur de marche de l'entreprise INTRODUCTION The question of why there is a wide variety in tax payments across firms has always been an agenda item for both policy makers and academics. Corporate tax aggressiveness has been a popular issue in recent years, and more tax studies are investigating what is associated with tax-aggressive activities. To date, the literature has shown that corporate tax aggressiveness is associated with a number of firm characteristics (size, prior losses, leverage, intensity of fixed assets, etc.), ownership structure (family-owned firms, institutional shareholding, inside shareholding, own- ership concentration, etc.), the weakness of internal control, the tax expertise of external audit firms, and the CEO's educational background, to name a few (Stick- ney and McGee, 1982; Zimmerman, 1983; Porcano, 1986; Omer et al., 1993; Gupta and Newberry, 1997; Klassen, 1997; Adhikari et al., 2006; Dyreng et al., 2008; Badertscher et al., 2009; Robinson et al., 2010; Zeng, 2010, 2011; Bauer, 2011; Armstrong et al., 2012, among others). Corporate social responsibility (CSR) has also received increased attention from both businesses and academics. There are a number of definitions applied to CSR. According to Mcwilliams and Siegel (2001), CSR means actions that enhance social goods, beyond any legal requirements and even beyond a firm's interests. Carroll (1979) stated that CSR means engaging in activities that respond to economic, legal, ethical, and discretionary expectations as well as to expecta- tions from broader society and other stakeholders (including consumers, suppliers, communities, governments, employees, and shareholders). Numerous studies have examined the relationship between CSR and firm performance, stock returns, and the cost of capital (Waddock and Graves, 1997; Stanwick and Stanwick, 1998; Forster and Meinhard, 2002; Bassen et al., 2006; Brammer et al., 2006; Paul and Siegel, 2006; Piercy and Lane, 2009; Ghoul et al., 2011; Dhaliwal et al., 2011, to name a few). However, only a few studies have explored the relationship between CSR and tax reporting practices. These studies focus on U.S firms and the results are mixed (Davis et al., 2013; Watson, 201la, b). As argued by Christensen and Murphy (2004), current CSR studies have touched on almost every other area of corporate engagement, except the one where a company's corporate citizenship is most tangible and important: corporate tax avoidance. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 9 This paper examines the relationship of CSR, tax aggressiveness, and firm mar- ket value. An economic model has been developed to show that profit-maximiza- tion firms are willing to incur additional costs in CSR, such as paying more taxes, as long as they can differentiate their products from non-CSR firms, and that socially conscious consumers will buy products from CSR firms at prices higher than those of non-CSR firms. This paper also links CSR to firm market value and argues that paying more taxes can enhance firm market value by contributing to higher CSR rankings. The empirical study in this paper indicates that socially responsible firms are less likely to undertake aggressive tax activities, while those firms that are less inter- ested in being socially responsible are more likely to undertake aggressive tax activi- ties. It also indicates that a reputation of higher CSR will enhance firm market value. Using Canadian companies listed in the S&P/TSX 60 index, I find that both firms' five-year effective tax rates and annual effective tax rates are positively associ- ated with their overall CSR scores as well as with their social scores. Firms' five- year effective tax rates are also positively associated with their governance index. I also find that firms' overall CSR ranking and governance scores are positively asso- ciated with their market value. Overall, the empirical results show that paying more taxes leads to higher CSR rankings and thus enhances firm market value. The remainder of this paper is organized as follows. Section 2 reviews the cur- rent literature on tax aggressiveness and CSR. Section 3 develops a theoretical model showing that paying more taxes and maximizing profits are compatible. It also develops two hypotheses for empirical tests. Section 4 designs the empirical models and describes sample selection and variables. Section 5 presents the main testing results as well as the supplementary testing results. Finally, section 6 concludes the study. LITERATURE REVIEW There are several accounting studies examining CSR and tax aggressiveness as well as other firm characteristics in recent years. Dhaliwal et al. (2011) find that initiat- ing the voluntary disclosure of CSR will attract dedicated institutional investors and analysis coverage, and reduce a firm's cost of capital. Richardson and Lanis (2012) argue that socially responsible firms are likely to deter tax-aggressive behav- ior. Using a sample of Australian public companies, they find a negative relation- ship between CSR disclosure and tax aggressiveness. Watson (201la) finds that in the United States, firms with low CSR scores undertake more aggressive tax activi- ties such as more book-tax differences, high effective tax rates, and more tax-shel- tering activities. In addition, Watson (2011b) finds that socially irresponsible firms generally have larger unrecognized tax benefits than socially conscious firms. He argues that socially responsible firms attract consumers and investors with similar norm and value and therefore deter these firms' tax aggressiveness activities. Hoi et al. (2013) also find that firms with excessive socially irresponsible activities are more likely to engage in tax aggressiveness. However, Davis et al. (2013) analyze AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)10 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES whether paying corporate tax is viewed as socially responsible. Using U.S. public firms, they find that CSR is negatively associated with effective tax rates, and is positively associated with tax-lobbying expenditures. Their results show that socially responsible firms pay less tax and engage in more tax lobbying. Given the mixed results on the relationship between CSR and tax aggressiveness, this paper examines the Canadian scenario. As Foster and Meinhard (2002) state, the Canadian government, unlike the U.S. government, plays a significant role in supporting universal social programs. As a result, it is expected that Canadian firms will act differently from their U.S. counterparts when considering CSR activities and that the relationship between CSR activities and tax aggressiveness is different in the two countries. Another factor to consider is that, while Canada's cultural environment is similar to that of the United States, its institutional environment is not. For example, the corporate tax rate in the United States is 40 percent, while in Canada it is around 30 percent. Prior studies suggest that a firm's national institu- tional context, including legal, regulatory, and professional structures, affect its sen- sitivities toward its social performance (Mahoney and Thorn, 2006) In addition, Canada has a very different industry mix than that of the United States. For example, Canada has the most number of publicly listed oil and gas companies, and Canadian stock exchanges raise the most capital for the mining sector in the world (Li et al., 2014). Given the fact that companies in high-profile, environmentally sensitive sectors such as oil, gas, and mining would have more incentives to build up a positive image and give prominence to CSR, Canada pro- vides an interesting scenario in which to examine the effect of CSR on firms' activi- ties, such as tax reporting. To make a comparison between the U.S. firms and Canadian firms, in a sup- plementary test, a Canadian indicator variable is included to test whether or not there is a difference in the Canadian context. I find that in Canada, paying more taxes contributes to a higher overall CSR ranking. In the next section, I develop an economic model showing that a profit-maxi- mization firm is willing to incur additional costs in CSR, such as paying more taxes, as long as it can differentiate its products from non-CSR firms, and that socially conscious consumers will buy products from CSR firms at prices higher than those of non-CSR firms. MODELS AND HYPOTHESES A number of studies on CSR argue that firms' involvement in CSR activities may contribute to enhancing profitability. In these studies, the firms' investment in CSR is a strategy through which firms can build up their reputation and differentiate their products from those of their competitors. Keith and Henderson (2010) argue that the adoption of a CSR program may improve a firm's image, with potential attendant business upsides. According to a survey conducted by the Canadian Democracy and Corporate Accountability Commission (CDCAC), 75 percent of AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 11 Canadians agree that the government should not purchase from companies with poor CSR records; 72 percent of Canadians agree that firms should have account- ability beyond their profit margins; and 74 percent of shareholders share the same opinions (Keith and Henderson, 2010). Also, a Canadian national poll (Abacus Data, 2014) survey found that over 60 percent of Canadians are willing to pay more for products and services from a socially responsible firm. A 2001 Hill & Knowlton/ Harris Interactive poll shows that 79 percent of Americans take CSR into account when they decide whether or not to purchase a particular firm's goods (Redman 2005). Marketing studies show that firms' social performance shapes consumers' purchasing intentions (e.g., Brown and Dacin, 1997; Creyer and Ross, 1997; Mohr and Webb 2005). Furthermore, Boehe and Cruz (2010) find that CSR contributes to product differentiation in the Brazilian export market and thus improves export per- formance. Flammer (2014) examines the causal mechanisms through which CSR can improve competitiveness in the U.S. manufacturing industry. Her findings sug- gest that firms engage in CSR in order to signal product quality and differentiate themselves from others. Lev et al. (2010) find that firms' charitable donations are significantly associated with their revenue growth and customer satisfaction. To incorporate the above arguments, I develop an economic model under a few assumptions; that is, socially conscious consumers exist, and will incur a disu- tility if they purchase goods produced by non-CSR firms, based on Barboza and Trejos (2011); socially conscious consumers are rational and maximize utility sub- ject to budget constraints; and both tax aggressive firms and tax compliant firms are profit maximizers. Socially Conscious Consumers There are two sets of perfect substitute products, those produced by CSR firms YCSR and those produced by non-CSR firms X,CsR. The products are perfect sub- stitutes in the physical sense, but are differentiated by their producers' reputation as CSR or non-CSR firms. Assume that there exist socially conscious consumers who prefer goods produced by CSR-firms to those produced by non-CSR firms. That is, socially conscious con- sumers would incur a disutility if they were to purchase goods produced by non-CSR firms. The utility function of a representative socially conscious consumer is U(XCSR, XnCSR) = log(XCSR) + (1 -n) log(X,,CSR), (1) where, similar to Barboza and Trejos (2011), n E (0, 1) is a parameter reflecting the fact that a disutility will be incurred if the socially conscious consumer pur- chases goods produced by non-CSR firms. The utility function is designed as a log function, so U' > 0 and U 1 for n E (0, 1), a CSR firm's goods can be priced higher than a non-CSR firm's goods. This is consistent with the arguments that one benefit for a firm that pursues CSR is gaining a good reputation and therefore having the potential to charge a premium price for its products. 1. Some studies discuss the benefits of a firm implementing CSR (Redman, 2005; Paul and Siegel, 2006; Ghoul et al., 2011; and Selvi et al., 2010), including attracting new customers, boosting revenue, and gaining a good reputation - and therefore the opportunity to charge a premium price for its products. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 13 However, if the price ratio between CSR goods and non-CSR goods Press much too high, i.e., the price for CSR goods is much too high relative to non-CSR goods, the consumer will purchase more non-CSR goods; otherwise, if the price ratio is too low, the consumer will purchase more CSR goods. Parameter n actually measures the degree of disutility incurred for the socially conscious consumer to purchase non-CSR goods. As n increases, the socially con- scious consumer is willing to pay more for CSR goods, thereby creating opportuni- ties for firms to behave in a socially responsible manner. If the extreme case of n = 0 exists, that is, the consumer does not incur disutil- ity by purchasing non-CSR goods, or he/she cannot differentiate between CSR goods and non-CSR goods, CSR goods cannot be sold at a price higher than non- CSR goods. In the other extreme case, where n = 1, that is, purchasing non-CSR goods will not contribute to the socially responsible consumer's utility at all, there is no market for non-CSR goods. Firms Assume there are two sets of firms: tax-aggressive firms and tax-compliant firms. Both produce in a competitive market and are price takers. For a tax-compliant firm, an additional cost A(.) is incurred from giving up tax-aggressive activities and hence paying more taxes than a tax-aggressive firm. Assume this cost A(.) is increasing in output. For simplicity, assume A(.) is equal to p > 0 per unit of out- put produced by tax compliant firms. The profit maximization problem faced by tax-compliant firms is to choose output X,c to Max n = PicXic - c(Xic) - pXic X te s.t. Xic 2 0, where c(.) is the cost function which is increasing in output X,c. The resulting F.O.C. for this firm's profit maximization problem is OX Ic = Pic - C'(Xic) - p50, with X, 20 and Xicay. = 0. (7) Equation (7) shows that, even in the presence of extra tax cost p, a firm will produce positive output (X, > 0) as long as the marginal cost is less than or equal to marginal revenue. For a tax aggressive firm, the profit maximization problem is to choose output to Max n = PlaXia - c(Xia) Xia s.t. Xia 2 0. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)14 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES The resulting F.O.C. for this firm's profit maximization problem is ant On* OX ta = Pla - C'(Xta) 0 and Xia > 0. (9) Equation (9) shows that tax-compliant firms will charge a higher price for their products by p, being the cost of paying more tax per unit. Notwithstanding the fact that tax-compliant firms incur an additional cost of paying more taxes, they can still maximize profits if they are seen as CSR firms, since goods from CSR firms can be priced higher than non-CSR goods, as depicted in equation (6). In other words, the additional cost incurred by tax-com- pliant firms is in fact the cost of differentiating their goods from other firms. In fact, whether or not a firm decides to behave in a tax-compliant manner depends on the prices it can charge socially conscious customers. If the price differ- ence between tax-compliant products and tax-aggressive products is equal to the additional cost of paying more taxes by a tax-compliant firm, there will be a combi- nation of tax-compliant and tax-aggressive firms in the market. Alternatively, if the price difference is higher than the additional cost of paying more taxes, all firms will behave with tax compliance, whereas if the price difference is lower than the addi- tional cost of paying more taxes, all firms will behave with tax aggressiveness. Firms are subject to the expectations of all their stakeholders including employees, shareholders, consumers, communities, as well as governments; that is, firms are expected to consider the concerns of the broader society. Complying with tax obligations, refraining from using aggressive or abusive avoidance techniques. and disclosing detailed tax-planning transaction are all important tools used by firms to engage with the broader society. Tax aggressiveness, on the other hand, is perceived by the broader society as a firm not paying its fair share of taxes thereby transferring a larger share of the overall tax burden onto others. Tax aggressive- ness enables a firm to become a free-rider, i.e., it enjoys benefits and resources without paying (Christensen, 2004). Tax aggressiveness can also harm firms' repu- tations and branding images (Fisher, 2014). Tax aggressiveness is therefore not compatible with good corporate citizenship and can be viewed as being socially irresponsible. Therefore, I expect that paying more taxes (p > 0 in the above models) would increase the reputation of firms for being socially responsible and hence differenti- ate goods produced by these firms from others to maximize profit and market value. I thus specify the following two hypotheses. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 15 HYPOTHESIS 1. There is a positiveegative relationship between CSR and tax compliance/aggressiveness, ceteris paribus HYPOTHESIS 2. There is a positive relationship between CSR and firm market value, ceteris paribus. EMPIRICAL MODELS Sample and Data Collection Financial data have been collected from the System for Electronic Document Ana- lysis and Retrieval (SEDAR) (CSA, 2014) for five years from 2005 to 2009. SEDAR reports the financial statements of all Canadian public companies and venture capitals. CSR index data have been collected from the 2010 CSR Ranking from Corpo- rate Knights Research Group. Corporate Knights Research Group evaluates the environmental, social, and governance activities for TSX 60 firms in Canada based on internationally recognized standards. The index is measured between 0 percent and 100 percent. The data include not only overall CSR scores but also the scores of the individual components of CSR, such as social, governance, and environment tal scores. The environmental score measures a firm's energy, carbon, water, and waste productivities. The governance score measures a firm's sustainability leadership, leadership diversity, and sustainability remuneration. The social score measures a firm's employee safety, compensations between CEO and workers, percentage of tax paid, pension plan, and pension funding. Since the CSR Ranking from Corporate Knights Research Group is published in the Global and Mail every year and is also available on-line, a large percentage of the population has access to it. Regression Models To determine the relationship between a firm's CSR and tax aggressiveness and to test Hypothesis 1, I design the following regression models: CSR; = do + al ETR; + Ex AKCONTROL; + ( Industry dummies) + 8;, (10) SOCIAL; = do + al ETR; + , AK CONTROL; + (Industry dummies) + Ei, (11) GOVERN; = do + , ETR; + _, AKCONTROL; + (Industry dummies) + 8;, (12) 2. About 40 percent of firms (19 firms) do not have environmental scores. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)16 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES where ETR; = effective tax rate for firm i CSR; = overall corporate social responsibility index for firm i GOVERN; = corporate governance index for firm i SOCIAL; = corporate social index for firm i CONTROLit = a set of control variables I measure a firm's tax aggressiveness in two ways, that is, five-year cash tax rate and annual cash effective tax rate, based on prior tax-avoidance literature (Dyreng et al., 2008; Watson 201la, etc.). The annual cash effective tax rate is defined as annual tax paid divided by annual pre-tax income. As argued by Dyreng et al. (2008), the annual effective tax rate may not be a good measure of tax liabil ity every year, since firms usually overpay taxes in one year and receive refunds in the other year. Alternatively, I use a five-year cash effective tax rate, which is mea- sured as the sum of taxes paid over five years from 2005 to 2009, divided by the sum of pre-tax book income over those same five years. The five-year cash effective tax rate is calculated as: 2009 E tax paid, five-year effective tax rate = 1=2005 2009 _ pre - tax income, 1=2005 The numerator is cash tax paid, shown on the cash flow statement. I control for other firm characteristics that could potentially affect a firm's CSR activities, as documented in previous studies (Waddock and Graves, 1997; Stanwick and Stanwick, 1998; Foster and Meinhard, 2002; Brammer et al., 2006; Paul and Siegel, 2006; Piercy and Lane, 2009, to name a few). They are, size (SIZE), measured as the log of total assets; return on assets ( ROA), measured as net earnings over total assets; losses (LOSS), an indicator variable, equal to 1 for firms with loss carryovers at the beginning of 2005; leverage (LEV), measured as the sum of short-term and long-term debts over total assets; capital intensity (FIX), the ratio of fixed assets to total assets; and inventory intensity (INV), the ratio of inventory to total assets. Hypothesis 1 predicts a > 0. The second hypothesis is on the association between CSR and firm market value. Based on Ohlson's (1995) residual income model, firm market value can be expressed as firm book value and earnings. Therefore, I design the following regression models: VAL = Bo + B, CSR; + B2BOOK; + B3ROA; + (Industry dummies) + &it, (13) AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 17 VAL; = Bo + B, SOCIAL; + B2BOOK; + B3ROA; + (Industry dummies) + Eit, (14) VAL; = Bo + B, GOVERN; + B2BOOK; + B3ROA; + (Industry dummies) + Eit, (15) where VAL; = averaged fiscal-year-end share price from 2005 to 2009 for firm i CSR; = overall corporate social responsibility index for firm i GOVERN; = corporate governance index for firm i SOCIAL; = corporate social index for firm i BOOK; = shareholders' equity, deflated by total assets for firm i ROA; = net earnings over total assets for firm i Hypothesis 2 predicts B1 > 0. The original sample includes TSX 60 firms. I delete five companies which are trusts and are taxed differently than the other firms. When using the annual effective tax rate, I further delete 38 observations with either a negative pre-tax income or with the annual effective tax rate falling outside [0, 1]. As a result, there are 237 observations left. When using the five-year effective tax rate, I delete two companies with the five-year effective tax rate falling outside [0, 1], following other studies of effective tax rates (Dyreng et al., 2008). As a result, the final sample includes 53 firms. Table 1 shows the distribution of the sample firms by industry according to the Global Industry Classification (GIC), which is collected from the Corporate Knights Research Group database. The major industries are energy (1 1 firms), financials (1 1 firms), materials (10 firms) and consumer staples and discretionary (10 firms). The four major industries are included to control for potential industry fixed effects in all the above regression models. EMPIRICAL RESULTS Panel A from Table 2 presents the mean and median values of CSR ratings and ETR for each of the four major industries. It shows that energy has the highest mean value of the overall CSR scores; financials has the highest mean and median values of social scores; and materials has the highest mean and median values of governance scores. Financials has the lowest mean and median values of five-year ETR as well as annual ETR. Panel B from Table 2 presents the descriptive statistics of all major variables. It shows that on average, the five-year ETR is 21.5 percent, which is less than the AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)18 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES TABLE 1 Distribution of sample firms by industry Industry (GICS sector) Numbers of firms Energy Consumer staple and discretionary Materials Financials 10 Industrials Telecommunications Utilities - - NWA Information Technology Healthcare Total 53 statutory rate (around 30 percent from 2005 to 2009). The annual ETR, on aver- age, is 24.34 percent, which is also less than the statutory rate. Panel B from Table 2 also reveals that, on average, TXS 60 firms have an overall CSR index of 49.3 percent, a governance index of 37.9 percent and a social index of 61.2 percent. The maximum overall CSR index is 80.8 percent, while the minimum overall CSR index is 2.6 percent. In addition, Panel B from Table 2 documents that, on average, profitability (ROA) is 0.084, leverage (LEV) is 0.174, average share price is $36.97, and more than 75 percent of firms have a loss carry-over from prior years. Table 3 reports the Pearson correlation matrix. It shows the correlations between major variables. The maximum absolute value of the correlation is 0.808, between BOOK and SIZE. The minimum absolute value of the correlation is 0.0001, between ROA and LEV. Consistent with the hypotheses, ETR is positively associated with CSR; and CSR is positively associated with VAL. Table 4 presents the results from models 10 to 12, where ETR is measured as the five-year cash ETR. Column 3 shows the results from model 10, where the overall CSR is regressed on ETR and other control variables. Column 4 shows the results from model 11, where a component of the CSR index, the social index, is regressed on ETR and other control variables. Column 5 shows the results from model 12, where a component of the CSR index, the governance index, is regressed on ETR and other control variables. Column 3 shows that, consistent with Hypothesis 1, the coefficient on ETR is positive and statistically significant at the 0.01 level, which implies that paying AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 19 TABLE 2 Descriptive statistics Panel A: Descriptive statistics by industries Energy Consumer Material Financials Variable Mean Median Mean Median Mean Median Mean Median CSR 0.556 0.555 0.427 0.442 0.498 0.51 0.536 0.563 SOCIAL 0.656 0.687 0.624 0.61 0.453 0.434 0.733 0.72 GOVERN 0.549 0.681 0.186 0.042 0.559 0.683 0.341 0.37 ETRI 0.242 0.246 0.275 0.282 0.226 0.217 0.18 0.183 ETR2 0.292 0.239 0.431 0.296 0.496 0.191 0.231 0.207 Panel B: Summary statistics for all firms Variable Mean Median Ist quartile 3rd quartile SD Minimum Maximum ETRI 0.215 0.215 0.144 0.282 0.114 0.012 0.556 ETR2 0.2434 0.2338 0.129 0.3165 0.1633 0.0021 0.968 CSR 0.493 0.506 0.396 0.617 0.157 0.026 0.808 SOCIAL 0.612 0.644 0.506 0.739 0.191 0.03 0.948 GOVERN 0.379 0.365 0.042 0.685 0.28 0.738 ROA 0.084 0.064 0.031 0.126 0.066 0.003 0.278 LEV 0.174 0.172 0.039 0.274 0.145 0 0.53 INV 0.052 0.016 0.063 0.073 0 0.276 FIX 0.44 0.469 0.141 0.677 0.302 0 0.929 LOSS 0.736 0.445 0 SIZE 10.919 10.917 10.488 11.214 0.685 9.641 12.475 BOOK 0.081 0.084 0.052 0.109 0.043 0.008 0.159 VAL 36.97 34.81 26.64 48.16 16.5 4.384 82.05 Notes: Table reports the summary statistics for the sample firms during the fiscal years 2005-2009. The variables are defined as follows: ETRI is five-year average effective tax rate, ETR2 is annual effective tax rate, CSR is overall 2010 corporate social responsible index, SOCIAL is 2010 corporate social index, GOVERN is 2010 corporate governance index, BOOK is measured as the sum of shareholders' equity over the sum of total assets, and VAL is averaged fiscal-year-end share price from 2005 to 2009. Firm-specific control variables are defined as follows. ROA: measured as the sum of earnings over the sum of total assets for five years from 2005 to 2009; LEV: measured as the sum of short- and long-term debts over the sum of total assets for five years from 2005 to 2009; FIX: capital intensity, the ratio of the sum of fixed assets to the sum of total assets for five years from 2005 to 2009; INV: inventory intensity, the ratio of the sum of inventory to the sum of total assets for five years from 2005 to 2009; LOSS: indicator variable, equal to 1 with positive loss carryovers at the beginning of 2005; SIZE: measured as log of the average total assets for five years from 2005 to 2009. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)20 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES TABLE 3 Pearson correlation matrix Variable CSR ETR ROA LEV INV FIX LOSS SIZE BOOK VAL CSR ETR 0.32 ROA -0.155 0.116 1 LEV -0.016 -0.179 -0.000 INV -0.145 0.266 0.244 0.012 1 FIX 0.051 -0.05 0.336 0.414 -0.099 LOSS -0.012 -0.137 0.083 0.313 0.004 0.115 SIZE 0.372 -0.096 -0.516 -0.192 -0.467 -0.385 -0.242 BOOK -0.236 0.142 0.561 -0.092 0.328 0.378 0.236 -0.808 VAL 0.293 0.041 -0.031 -0.168 -0.059 -0.232 -0.294 0.375 -0.258 Notes: Table reports the summary statistics for the sample firms during the fiscal years 2005-2009. The variables are defined as follows: ETR is five-year average effective tax rate, CSR is overall 2010 corporate social responsible index, BOOK is measured as the sum of shareholders' equity over the sum of total assets, and VAL is averaged fiscal-year-end share price from 2005 to 2009. Firm-specific control variables are defined as follows. ROA: measured as the sum of earnings over the sum of total assets for five years from 2005 to 2009; LEV: measured as the sum of short- and long-term debts over the sum of total assets for five years from 2005 to 2009; FIX: capital intensity, the ratio of the sum of fixed assets to the sum of total assets for five years from 2005 to 2009; INV: inventory intensity, the ratio of the sum of inventory to the sum of total assets for five years from 2005 to 2009; LOSS: indicator variable, equal to 1 with positive loss carryovers at the beginning of 2005; SIZE: measured as log of the average total assets for five years from 2005 to 2009. more taxes contributes to a higher overall CSR ranking. Similarly, column 4 shows that the coefficient on ETR is positive and statistically significant at the 0.01 level, which implies that firms that pay more taxes enhance their social scores. Finally, column 5 shows that the coefficient on ETR is positive and significant at the 0.1 level, which implies that paying more taxes also helps enhance gover- nance scores. In summary, Table 4 indicates that a high effective tax rate is positively associated with the overall CSR ranking as well as all the three CSR components. A few control variables are also significant. For example, the coefficient on SIZE is positive and significant for all the three models, which implies that large firms have high CSR scores as well as high social and governance scores. This is consistent with the argument that large firms are most likely to face public scrutiny and be forced to invest heavily in CSR. In addition, large firms generally have more resources and are therefore better able to make CSR a priority. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 21 TABLE 4 Testing results for five-year average effective tax rate Variable Exp. sign Model 10 Model 11 Model 12 Intercept ? -1.4676** -1.091* -2.806*** (-2.24) (-1.545) (-2.58) ETR + 0.570*** 0.648*** 0.480* (-2.841) (-2.998) (-1.441) ROA + -0.06 0.373 0.398 (-0.153) (-0.884) (-0.613) LEV 0.055 0.304* 0.135 (-0.26) (-1.321) (-0.381) INV 0.233 0.273 0.181 (-0.655) (-0.71) (-0.306) FIX 0.127 0.304* * * 0.07 (-1.216) (-2.695) (-0.405) LOSS 0.028 0.155** * -0.111* (-0.547) (-2.823) (-1.311) SIZE + 0.161** * 0.108* 0.280*** (-2.658) (-1.66) (-2.786) Energy -0.024 -0.071 0.085 (-0.31) (-0.854) (-0.669) Materials 0.062 -0.117* 0.348** * (-0.876) (-1.539) (-2.956) Financial -0.053 0.314** -0.272 (-0.396) (-2.185) (-1.23) Consumer + -0.051 0.057 -0.125 (-0.723) (-0.741) (-1.057) R2 (adj) 0.23 0.39 0.33 Observations 53 53 53 Notes: The table reports the testing results from the following regression models: CSR; = 20 + 1 ETR; + Ex 2KCONTROL: + (Industry dummies) + 8;, SOCIAL; = do + 1 ETR; + Ex AkCONTROL; + (Industry dummies) + Ei, GOVERN; = do + 1 ETR; + Ex AK CONTROL; + (Industry dummies) + 8, where ETR is five-year average effective tax rate, CSR is 2010 overall corporate social responsible index, SOCIAL is 2010 corporate social index, GOVERN is 2010 corporate governance index. Firm-specific control variables are defined as follows. ROA: measured as the sum of earnings over the sum of total assets for five years from 2005 to 2009; LEV: measured as the sum of short- and long- term debts over the sum of total assets for five years from 2005 to 2009; FIX: capital intensity, the ratio of the sum of fixed assets to the sum of total assets for five years from 2005 to 2009; INV: inventory intensity, the ratio of the sum of inventory to the sum of total assets for five years from 2005 to 2009; LOSS: indicator variable, equal to 1 with positive loss carryovers at the beginning of 2005; SIZE: measured as log of the average total assets for five years from 2005 to 2009. ***, **, and * denote significance at the 0.01, 0.05, and 0.10 levels, respectively, based on one-tailed t-test. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)22 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES LEV and FIX are positively associated with the social index. LOSS is posi- tively associated with social scores but negatively associated with governance scores. Finally, Table 4 shows that industry effect exists. Financial institutions are pos- itively associated with social scores. Materials sector is positively associated with governance scores but negatively associated with social scores. Table 5 presents the results from models 10 to 12, where ETR is measured as annual cash ETR. Column 3 shows the results from model 10, where the overall CSR is regressed on annual cash ETR and other control variables. Col- umn 4 shows the results from model 11, where a component of the CSR index, the social index, is regressed on annual cash ETR and other control variables. Column 5 shows the results from model 12, where a component of the CSR index, the governance index, is regressed on annual cash ETR and other control variables. Column 3 shows that, consistent with Hypothesis 1, the coefficient on annual ETR is positive and statistically significant at the 0.1 level, which implies that paying more taxes contributes to a higher overall CSR ranking. Similarly, col- umn 4 shows that the coefficient on annual ETR is positive and statistically sig- nificant at the 0.01 level, which implies that firms that pay more taxes enhance their social scores. However, column 5 shows that the coefficient on annual ETR is not significant, which implies that paying more taxes annually does not enhance a firm's governance scores. In summary, Table 5 indicates that a high effective tax rate is positively associated with the overall CSR ranking and the social scores. A few control variables are also significant. Some of the results are similar to those in Table 4. For example, the coefficient on SIZE is positive and significant for all three models; LEV and FIX are positively associated with the social index; and LOSS is positively associated with social scores but negatively associated with governance scores. In addition, Table 5 shows that ROA is positively associated with both the social and governance scores. Finally, Table 5 shows that industry effects exist. The four industries are all significant for some or all CSR scores. Table 6 presents the results from models 13 to 15, where I link CSR ranking and its components to firm market value. Column 3 shows the results from model 13, where firm market value is regressed on the overall CSR, book value, and earnings. Column 4 shows the results from model 14, where firm market value is regressed on the social index, book value, and earnings. Column 5 shows the results from model 15, where firm market value is regressed on the governance index, book value, and earnings. It shows that, consistent with Hypothesis 2, the coefficient on CSR is positive and statistically significant at the 0.01 level, which AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 23 TABLE 5 Testing results for annual effective tax rate Variable Exp. sign Model 10 Model 11 Model 12 Intercept -1.1**# -0.788*** - 1.986**# (-4.327) (-2.827) (-5.076) ETR + 0.087* 0.151* * 0.082 (-1.463) (-2.317) (-0.894) ROA + 0.02 0.281* * 0.275* (-0.15) (-1.874) (-1.31) LEV 0.029 0.213** 0.05 (-0.329) (-2.24) (-0.376) INV 2 0.149 0.145 0.089 (-0.919) (-0.817) (-0.356) FIX 0.062* 0.208*** 0.028 (-1.306) (-4.013) (-0.386) LOSS 2 0.008 0.12** * -0.119**# (-0.364) (-4.99) (-3.52) SIZE 0.149**# 0.105**# 0.232* *# (-5.899) (-3.799) (-5.97) Energy 0.03 -0.013 0.14** * (-0.034) (-0.342) (-2.653) Materials 0.092**# -0.072** 0.349**# (-2.895) (-2.06) (-7.145) Financials -0.067 0.233** * -0.261*** (-1.215) (-3.843) (-3.073) Consumer -0.009 0.102**# -0.11 1** (-0.282) (-2.865) (-2.212) R' (adj) 0.24 0.38 0.45 Observations 237 237 237 Notes: The table reports the testing results from the following regression models: CSR; = do + 1 ETR; + Ex AK CONTROL; + (Industry dummies) + &;, SOCIAL; = do + 1 ETRi + _x x CONTROL; + (Industry dummies) + E;, GOVERNi = do + 1 ETR; + _, AKCONTROL; + (Industry dummies) + Ei, where ETR is annual effective tax rate, CSR is 2010 overall corporate social responsible index, SOCIAL is 2010 corporate social index, and GOVERN is 2010 corporate governance index. Firm-specific control variables are defined as follows. SIZE: measured as log total assets; ROA: measured as net earnings over total assets; LOSS: indicator variable, equal to 1 with positive loss carryovers at the beginning of 2005; LEV: measured as the sum of short- and long-term debts over total assets; FIX: capital intensity, the ratio of fixed assets to total assets; INV: inventory intensity, the ratio of inventory to total assets. ***, **, and * denote significance at the 0.01, 0.05, and 0.10 levels, respectively, based on one-tailed t-test. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)24 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES implies that a high overall CSR ranking enhances firm market value. Similarly, col- umn 5 shows that the coefficient on the governance index is positive and statisti- cally significant at the 0.01 level, which implies that a high governance score also enhances firm market value. Column 4, however, shows that the coefficient on social index is not significant. In addition, energy and materials are negatively associated with firm market value, but financials and consumer staple and discre- tionary are positively associated with firm market value. I use White's (1980) test to find that heteroskedasticity is not a problem. The CSR ranking from Corporate Knights Research Group reveals that tax payment is a factor that determines social and final scores (i.e., tax payment con- tributes 20-25 percent to social scores and 6-10 percent to final scores). The tax- payment factor is calculated based on the average percent of statutory taxes paid over the last four fiscal years (via annual reports), that is, cash tax over taxes owed at the statutory rate. In a robust test, I adjust the social and final CSR scores by excluding tax pay- ment. I calculate the average cash effective tax rate over four years before CSR ranking is disclosed. For those firms with an average cash effective tax rate higher than the statutory tax rate, their social scores are reduced by 20-25 percent and the final scores are reduced by 6-10 percent. The results, not presented in the paper, are similar to those in Table 5 to the extent that ETR is positively associ- ated with the social, governance, and final scores. It is desirable to directly compare the results in this paper with those for the U.S. firms presented in prior literature (Watson, 201la,b; and Davis et al., 2013). However, the CSR measurements used in prior literature are different from those used in this study. For example, Watson (201la,b) and Davis et al. (2013) use CSP ratings produced by Kinder, Lydenberg and Domini Research & Analysis. The data are only for the U.S. firms, which provide integer scores of strength and concerns in several categories including corporate governance, community, diversity, environment, human rights, and so on. The ratings can be positive or negative. To make a comparison between the U.S. firms and the Canadian firms, in a supplementary test I have collected the overall CSR rankings for 2012 and 2013 for the global 100 most sustainable corporations from Corporate Knights Research Group. There are 18 U.S. firms and 13 Canadian firms in 2013 among the global top 100 sustainable corporations. In 2012, there are 10 U.S. firms and 10 Canadian firms among the global top 100 sustainable corporations. The database from Cor- porate Knights Research Group provides a uniform measurement of overall CSR for both the U.S. firms and Canadian firms. Initially there are 51 firm-year obser vations. After deleting 6 observations with unavailable financial reports, negative pre-tax earnings, or effective tax rates falling outside [0, 1], there are 45 observa- tions left. Financial data for the U.S. firms have been collected from the SEC 10-K database. Financial data for Canadian firms have been collected from the AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 25 TABLE 6 Testing results on market value Variable Exp. sign Model 13 Model 14 Model 15 Intercept ? 10.327 25.995** 18.441** (-0.909) (-2.063) (-2.217) BOOK + 11.242 -27.599 35.947 (-0.127) (-0.294) (-0.426) ROA 65.4* 56.559* 49.690* (-1.625) (-1.318) (-1.303) CSR 37.84** * (-2.628) SOCIAL 8.665 (-0.641) GOVERN + 30.58** * (-3.555) Energy 2 -5.407 -1.409 -9.537* (-0.801) (-0.2) (-1.433) Materials -9.25 -4.141 -17.05* * (-1.177) (-0.502) (-2.116) Financials 15.52* * 14.58* 17.04* * (-1.896) (-1.661) (-2.19) Consumer 2 7.326 7.059 8.811* (-1.115) (-0.998) (-1.41) R2 (adj) 0.18 0.07 0.26 Observations 53 53 53 Notes: The table reports the testing results from the following regression models: VALi = Bo + B,CSR; + B2BOOK; + B3ROA; + (Industry dummy) + Eit, VALi = Bo + B, SOCIAL; + B2BOOK; + B3ROA; + (Industry dummy) + Eit, VALi = Bo + B, GOVERN; + B2BOOK; + B3ROA; + (Industry dummy) + Eit, where CSR is overall corporate social responsibility index, GOVERN is corporate governance index, SOCIAL is corporate social index, BOOK is measured as the sum of shareholders' equity over the sum of total assets for five years from 2005 to 2009, and ROA is measured as the sum of net earnings over the sum of total assets for five years from 2005 to 2009. ***, **, and * denote significance at the 0.01, 0.05, and 0.10 levels, respectively, based on one-tailed 1-test. SEDAR database. A Canadian indicator variable is included in model 10 to test whether or not there is a difference in the Canadian context. Therefore, the regres- sion model is designed as follows: AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)26 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES TABLE 7 Results from supplementary test Exp. sign Model 16 Intercept 0.428* (1.643) CAN -0.037 (-0.857) ETR + -0.246* (-1.693) CANXETR 0.297** (1.878) ROA + 0.71* * (2.34) LEV -0.126** (-1.781) INV 0.244 (1.098) FIX -0.016 (-0.214) LOSS 0.17** (2.387) SIZE + 0.014 (0.675) Energy + -0.048* (-1.469) Technologies + -0.015 (-0.35) Financial + -0.067* (-1.358) Biotech + 0.003 (-0.081) R2 (adj.) 0.09 Observations 45 Notes: The table reports the testing results from the following regression models: CSRit = 00 + 01 ETRi + 02CAN; + +03CAN; X ETRi + Ex ORCONTROL: + (Industry dummies) + 8i, where ETR is annual effective tax rate, CSR is overall corporate social responsible index for 2012 and 2013, CAN is indicator variable, equal to 1 for Canadian firms. Firm-specific control variables are defined as follows. SIZE: measured as log total assets; ROA: measured as net earnings over total assets; LOSS: indicator variable, equal to I with net loss in last year; LEV: measured as the sum of short- and long-term debts over total assets; FIX: capital intensity, the ratio of fixed assets to total assets; INV: inventory intensity, the ratio of inventory to total assets. ***, **, and * denote significance at the 0.01, 0.05, and 0.10 levels, respectively, based on one-tailed f-test. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)CSR, TAX AGGRESSIVENESS, AND MARKET VALUE 27 CSRit = 00 + 01 ETRit + 02CAN; + +03CAN; X ETRi + ExxCONTROLit + (Industry dummies) + &i, (16) where CAN = 1 for Canadian firms and 0 for U.S. firms. Table 7 presents the results from model 16. It shows that the coefficient on CADETR is positive and statistically significant at the 0.05 level. It suggests that, in Canada, paying more taxes contributes to a higher overall CSR ranking. CONCLUSION AND SUMMARY This paper examines the relationship of CSR, tax aggressiveness and firm market value. An economic model is developed based on the idea by Barboza and Trejos (2011) to show that profit-maximization firms would be willing to incur additional costs in CSR (such as paying more taxes) as long as they can differentiate their products from those of non-CSR firms, and that socially conscious consumers will buy products from CSR firms at prices higher than those of non-CSR firms. The empirical study in this paper indicates that socially responsible firms are less likely to undertake aggressive tax activities, while those firms that are less interested in being socially responsible are more likely to undertake aggressive tax activities. It also indicates that a reputation of higher CSR will enhance a firm's market value. Using Canadian companies listed in the S&P/TSX 60 index, I find that both firms' five-year effective tax rates and annual effective tax rates are positively associated with their overall CSR scores as well as their social index. Firms' five-year effective tax rates are also positively associated with their governance index. However, the annual effective tax rates are not associated with the governance index. Based on Ohlson's (1995) residual income model, I also find that firms' overall CSR ranking and governance index are positively associated with their market value. However, the social index is not associated with firm market value. Overall, the empirical results show that paying more taxes leads to higher CSR rankings and thus enhances firm market value. In a supplementary test for cross-country comparison, I find that paying more taxes contributes to a higher overall CSR ranking in the Canadian context. It should be noted that firms implementing CSR may enjoy favorable tax treat- ments; for example, charitable donations are tax deductible as are R&D expendi- tures incurred in environmental and sustainability activities. These tax treatments will reduce the tax liability of CSR firms and hence will be biased against the results in this paper. This study provides important evidence that increases our understanding of the relation between CSR and tax aggressiveness in countries beyond the United States that have a different institutional environment and industry mix. AP Vol. 15 No. 1 - PC vol. 15, no 1 (2016)28 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES This study is of interest to policymakers, corporate managements, and aca- demics who wish to examine the relationship between CSR and other firm charac- teristics. 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