Corporate social responsibility (CSR): Focus on tax avoidance and financial ratio analysis

Abstract

This study aims to discover the relationship between financial ratios and tax avoidance in firms participating in corporate social responsibility (CSR) activities. Using a sample of 365 Chinese listed firms in the Shanghai and Shenzhen stock exchanges, we find that engaging in CSR activities discourages tax avoidance behaviors, especially in companies that actively participate in CSR activities. Concerning financial ratios, we also find that firms with higher profitability, higher cash flow, and higher sales growth are more likely to participate in tax avoidance. In contrast, firms with high liquidity are less likely to engage in tax avoidance. Based on the results of this study, tax authorities can predict whether a Chinese company will engage in tax avoidance activities in future by referring to its financial ratios. Moreover, tax authorities can use CSR activities to encourage companies to pay tax.