The relationship between corporate social responsibility and tax avoidance: a European case study

The primary objective of this thesis is to investigate the relationship between corporate social re-sponsibility (CSR) and tax avoidance on an European scale and the influence of market competitionon this relationship. Four different subgroups of CSR performance are also exploited in this thesis.Currently, there are several different ways companies could view CSR and tax avoidance. On the onehand, companies can view both CSR investments and paying taxes as contributions towards society.On the other hand, companies can see tax payments as a detraction from social welfare — firms thatavoid taxes have a greater capacity to invest in CSR — or view CSR investments as a form of riskmanagement when tax avoidance is employed. In line with these different visions, both a negative orpositive relationship can exist between CSR and tax avoidance. Furthermore, due to advantages thatcan be gained over competitors by accommodating market demand, market competition could haveits influence on this relationship.This study is based on observations from 657 European companies between 2005 – 2017, of whichthe data is retrieved from Worldscope database, OECD database, Compustat and ASSET4. A fixedeffects model, with year and firm fixed effects, is used for the main analyses, followed by severalrobustness checks such as country fixed effects and the instrumental variable (IV) method. To applythe IV method, the one-period lagged CSR performance is the used as the instrument. Little evidenceis found that supports a relation between CSR and tax avoidance, and a potential influence of marketcompetition. Only when country fixed effects are used or when the IV method is applied, some resultsshow a negative significant relationship between CSR performance and tax avoidance, which suggeststhat companies that invest more in CSR are also more likely to avoid tax. With regard to the effectmarket competition has on this relationship, only the IV method suggest that an increase in marketcompetition makes the relation weaker