ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Impact of Corporate Social Responsibility and Corporate Governance on the Market Reaction to the Disclosure of Tax Penalty

  • Jae Yeon Jeong Kangwon National University

Asian Tax Journal Vol. 20 No. 1 (2019), pp. 9-39

Abstract

This study examines whether the market reaction to the disclosure of tax penalty varies depending on the firms’characteristics. Specifically, we focus on corporate social responsibility and corporate governance. The results of this study are as follows. First, we analyzed the average daily excess return (AAR) and cumulative excess return (CAR) for 130 firm-year observations that disclosed tax penalties from 2006 to June 2018. We find that AARs represent significantly negative values on the disclosure date and 1 trading day after disclosure date. Since then there is no significant change. CARs also show significantly negative values from 1 trading day after the disclosure date and the effect last by 20 trading days after the disclosure date. Second, we find that the corporate social responsibility (CSR) characteristics has a positive correlation with CARs and the corporate governance characteristics also has a positive correlation with CARs. These results imply that corporate social responsibility activities and better corporate governance mitigate the negative market reaction to the disclosure of tax penalty which is the strongest proof that the firm avoided tax burden. And also these results imply that investors might believe firms with superior corporate social responsibility activities and corporate governance do not avoid tax only for the private benefit of the management. This study suggests the empirical evidence that the market reaction to the disclosure of negative news might vary depending on the corporate social responsibility and corporate governance. In addition, this study also implies that even though the tax penalty means firms’illegal tax avoidance, investors’belief in firms’transparency and credibility might mitigate the non-tax costs such as negative market reactions.

Keywords

  • Tax Penalty
  • Stock Price
  • Abnormal Return
  • Corporate Social Responsibility
  • Corporate Governance

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