Donation and Tax Avoidance

This study examines the association between a firm’s donation activity and its tax avoidance behavior, using KOSDAQ-listed companies. There are several reasons behind managers’ decisions to contribute (e.g. political issue, adverting incentives, tax saving incentives and etc.). Among these, we focus on firms’ intention to diligently perform their corporate social responsibilities through donation. Specifically, we view that donation by non-large firms may have a more ethical intention than that by large firms, because they will be less likely to be exposed to the social pressure for donation and have less resources to contribute for the purpose of advertising. Our prediction is that if a firm conducts a social contribution activity through donation, it will show a similar pattern of behavior in tax compliance, which we view as another line of activity relevant to corporate social responsibility. Analyzing 1,868 firm-year observations during the period of 2000-2008 for KOSDAQ-listed companies, we document evidence that firms which engage in donation activity tend to pay more taxes. And the result is robust even when we use the two-stage model suggested by Heckman (1979). This suggests that ethical corporate culture which is measured through donation activity influences firms to faithfully comply with tax liability.