CSR, Tax Avoidance, and Cost of Debt

Abstract

Theories in management strategy argue that CSR generates economic value either through enhancing corporate performance or through preserving corporate performance. The insurance-like argument of CSR focuses on generating economic values through mitigating the adverse effects of negative events. This paper examines the insurance property of CSR in the context of cost of debt financing and tax avoidance. Specifically, I examine whether tax-avoiding firms with superior CSR performance enjoy a lower cost of debt financing. Using three measures of tax avoidance, two measures of cost of debt, and a measure of CSR based on KLD indicators, I find that firms with higher levels of tax avoidance and a better CSR performance have lower bond spread and superior credit rankings. Additional analysis indicates that tax-avoiding firms reduce their cost of debt mainly through enhancing positive CSR performance than reducing poor CSR activities. Further analysis reveals that firms with higher levels of tax avoidance (i.e. top quartile of tax avoidance) receive greater benefits from participation in CSR activities .These findings provide support for the hypothesis that firms utilize CSR activities to temper adverse effects of risky behaviors such as tax avoidance.