Are Corruption and Corporate Tax Avoidance in the U.S. Related?

Review of Accounting Studies, Forthcoming

59 Pages Posted: 6 Feb 2021

See all articles by Ahmed Al-Hadi

Ahmed Al-Hadi

Curtin University - School of Accounting; CBFS

Grantley Taylor

Curtin University - School of Accounting

Grant Richardson

Department of Accounting and Corporate Governance

Date Written: October 28, 2020

Abstract

In this study, we examine whether state-level corruption and corporate tax avoidance in the U.S. are related. Using a sample of 36,078 U.S. firm-year observations from 1998 to 2014, we find that corruption is significantly positively related to tax avoidance. Our main finding is consistent across a series of robustness tests. In additional analysis at the state-level, we observe that corruption is significantly positively related to corporate tax avoidance in states that have low levels of litigation risk, irrespective of whether the states rank high or low in terms of corporate governance, social capital or money laundering. We also correlate state- and firm-level corruption with firm-level corporate tax avoidance and find that the interaction terms are generally significantly positively related to corporate tax avoidance. Finally, we show that state-level corruption and corporate tax avoidance are complementary across industry sectors. Overall, our results indicate that the broader state-level corruption (cultural) effects of where a firm is headquartered have significant consequences for corporate tax avoidance.

Keywords: corruption, corporate tax avoidance

JEL Classification: G30, H20

Suggested Citation

Al-Hadi, Ahmed and Taylor, Grantley and Richardson, Grant, Are Corruption and Corporate Tax Avoidance in the U.S. Related? (October 28, 2020). Review of Accounting Studies, Forthcoming , Available at SSRN: https://ssrn.com/abstract=3724290

Ahmed Al-Hadi (Contact Author)

Curtin University - School of Accounting ( email )

Australia

CBFS ( email )

Ruwi, 112
Oman
98999651 (Phone)

Grantley Taylor

Curtin University - School of Accounting ( email )

Australia

Grant Richardson

Department of Accounting and Corporate Governance ( email )

4 Eastern Road
North Ryde
New South Wales, NSW 2109
Australia

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