The Effect of Tax Expense Management and CSR Ratings on Investor Perceptions of Firm Value and CSR Performance

Recent literature finds that investors positively value tax management activities that reduce taxes paid. Yet recent press suggests a negative backlash against companies that do not pay their “fair share.” Little empirical evidence exists regarding investor perceptions of tax management. We posit that investors view corporate tax activities as a component of corporate social responsibility (CSR). We also predict the interaction of tax management and CSR performance influences investor perceptions about CSR and investor pricing behavior. We find that investors provided only with information about tax management view it as a component of CSR and view companies that pay more taxes as more socially responsible. When investors have access to both tax information and CSR ratings, we find investors perceive paying more taxes as socially responsible if the firm has an otherwise poor CSR performance. However, when CSR performance is high, tax management does not influence perceptions about CSR. Also, although investors may consider paying more taxes a socially responsible activity, we only find a price premium for firms that have both good CSR ratings and effectively manage their taxes. Our results are consistent with an interactive effect of CSR performance and tax management on investor perceptions of CSR and pricing behavior. Further analysis suggests that the perception of CSR and pricing effects we observe are the result of investor affect