Corporate Social Responsibility and Profit Shifting
59 Pages Posted: 31 Jan 2019 Last revised: 14 Oct 2020
Date Written: October 14, 2020
This paper studies the relationship between corporate social responsibility (CSR) and profit shifting. Using a profit-shifting measure derived from worldwide data for parent firms and their foreign subsidiaries, we find that corporate social responsibility is positively and significantly associated with profit shifting, consistent with the legitimacy theory and a risk-management strategy. Such a positive relationship is more pronounced in parent firms located in countries under the territorial tax system and in countries where product boycotting is more prevalent. Our findings are robust to a battery of sensitivity and endogeneity tests. Overall, our evidence suggests that multinational firms with higher CSR scores shift larger amounts of profits to their low-tax foreign subsidiaries, potentially indicating strategic planning in the choice of CSR investments by multinational enterprises.
Keywords: Corporate Social Responsibility; Legitimacy Theory; Risk Management; Profit Shifting; Corporate Tax Systems; Agency Problems
JEL Classification: F23, G30, G32, H25, H26, L10, L21, M14
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