Designation as the Most Admired Firms to the Sustainable Management of Taxes: Evidence from South Korea

Abstract

This study examines whether the designation as the most admired firms affects firms’ tax management behavior. Based on 6880 Korean firms from 2014 to 2018, we regressed to analyze the relationship between the designation as the most admired firms and tax avoidance. Designation as the most admired firm is considered to result in a high reputation, and reputation is one of the intangible assets when assessing the firm value. We found that the firms designated as the most admired firms are reluctant to avoid taxes. Reputable firms are expected to be consistent with their fame. Therefore, those firms are less engaged in unethical or immoral tax avoidance. We also found a positive effect of the index for environmental, social, and governance on the relationship between the designation as the most admired firms and tax avoidance. Environmental, social, and governance activities are the managements’ choice and are a part of corporate activities, whereas firms’ reputations result from enterprise-wide activities. The findings suggest that the designation as the most admired firms with regard to environmental, social, and governance activities is considered highly reputable and results in deciding to improve corporate sustainability in tax management. The relationship between the designation as the most admired firms and tax avoidance is strengthened in an information environment where the firms are Chaebol-affiliated and in high information asymmetry.