Family ties and corporate tax avoidance

Abstract

A well-established body of international business research examines how the institutional environment influences corporate decisions. We add to this literature by investigating the unexplored link between family, a fundamental institution in human society, and corporate tax decisions. Applying theories on social norms and the evolution of moral boundaries, we argue that the strength of family ties in a society increases corporate tax avoidance by narrowing the scope of moral responsibilities. We confirm this argument by conducting regression analyses using a large sample of firms from 44 countries. In addition, the positive effect of family ties on tax avoidance is attenuated for firms in countries with inclusive political institutions and is amplified for family firms. Using a sample of U.S. companies, we also find that firms avoid more taxes when they are located in states with stronger family ties and when their CEOs are from countries with stronger family ties, indicating that both the social norms that surround firms and those that are embedded in the origin countries of the managers affect firm tax decisions. Our study implies that the institution of family provides a valuable perspective to understand the international differences in corporate behaviors.

Plain language summary

In a globalized business environment, comprehending the elements that sway corporate actions is vital. Corporate tax avoidance, which could result in significant revenue deficits for worldwide governments, is one focus area. Despite extensive studies on formal institutions like laws and regulations, the influence of informal institutions, such as family, on corporate tax strategies is not well understood. This research addresses this gap by investigating how the intensity of family ties in various societies affects corporate tax avoidance. This research scrutinized data from 148,459 firm-year observations across 44 countries from 2002 to 2020. The World Values Survey, which gauges the intensity of family ties in each country, was utilized by researchers and compared to the degree of tax avoidance by companies, defined as the disparity between the tax on pre-tax income and the actual taxes paid. The study is observational and employs statistical techniques to account for different factors that could impact the results, ensuring the findings are solid and dependable. The researchers discovered that companies in nations with strong family ties tend to avoid more taxes than those in nations with weaker family ties. This implies that in societies where family bonds are strong, there may be a lesser moral obligation to pay taxes for the welfare of the wider public. Additionally, the research examined whether inclusive political institutions (which spread power widely and have robust governance) or family control of firms moderated this relationship. It was found that inclusive political institutions lessen the positive effect of family ties on tax avoidance, while family-controlled firms are more likely to engage in tax avoidance in societies with strong family ties. The study's findings are significant. They underscore that informal institutions like family ties can influence corporate behavior just as much as formal regulations. This understanding could assist policymakers, regulators, and international organizations in understanding the cultural factors that drive tax avoidance and in formulating strategies to address it. The findings also suggest that fostering inclusive political institutions could counteract the negative effects of strong family ties on tax compliance. In conclusion, while the study doesn't assert that avoiding taxes is inherently bad, as firms may reinvest the saved money in ways that ultimately benefit society, it does provide a clearer understanding of the intricate relationship between culture, institutions, and corporate behavior. The hope is that this research will lay the groundwork for future studies on the determinants of tax avoidance and the design of tax systems that consider cultural factors. This text was initially drafted using artificial intelligence, then reviewed by the author(s) to ensure accuracy.

Résumé

Il existe un ensemble bien établi de recherches en affaires internationales examinant comment l'environnement institutionnel influence les décisions des entreprises. Nous enrichissons cette littérature en étudiant le lien inexploré entre les décisions fiscales des entreprises et la famille, institution fondamentale de la société humaine. En appliquant les théories des normes sociales et de l'évolution des frontières morales, nous argumentons que la force des liens familiaux dans une société augmente l'évitement de l'impôt sur les sociétés en réduisant la portée des responsabilités morales. Nous confirmons cet argument en effectuant des analyses de régression à partir d'un large échantillon d'entreprises de 44 pays. En outre, l'impact positif des liens familiaux sur l'évasion fiscale est atténué pour les entreprises des pays dotés d'institutions politiques inclusives et est amplifié pour les entreprises familiales. En utilisant un échantillon d'entreprises américaines, nous constatons également que les entreprises évitent davantage d'impôts lorsqu'elles sont situées dans des États où les liens familiaux sont plus forts et lorsque leurs PDG sont originaires de pays où les liens familiaux sont plus forts, ce qui indique que les normes sociales qui entourent les entreprises et celles qui sont ancrées dans les pays d'origine des dirigeants influencent les décisions fiscales de l'entreprise. Notre recherche implique que l'institution de la famille offre une perspective précieuse pour comprendre les différences internationales dans les comportements des entreprises.

Resumen

Un corpus bien establecido de publicaciones de investigación en negocios internacionales examina como el entorno institucional influencia las decisiones corporativas. Añadimos a esta literatura al investigar en vínculo inexplorado entre la familia, una institución fundamental en la sociedad humana, y las decisiones fiscales corporativas. Al aplicar teorías sobre normas sociales y la evolución de los limites morales, argumentamos que la fortaleza de los lazos familiares en una sociedad aumenta la evasión corporativa de impuestos al reducir el alcanza del ámbito de las responsabilidades morales. Confirmamos este argumento al llevar a cabo análisis de regresión utilizando una amplia muestra de empresas de 44 países. Adicionalmente, el efecto positivo de los lazos familiares es atenuado en países con instituciones políticas inclusivas y se amplifica para las empresas familiares. Usando una muestra de empresas estadounidenses, también encontramos que las empresas evaden más impuestos cuando están ubicadas en estados con mayores vínculos familiares y cuando sus directores ejecutivos (CEOs) son oriundos de países con lazos familiares más fuertes, esto indica que tanto las normas sociales que rodean las empresas como aquellas que están integradas en los países de origen de los gerentes afecta las decisiones fiscales corporativas. Nuestro estudio implica que la institución de la familia suministra una perspectiva valiosa para entender las diferencias internacionales en comportamientos corporativos.

Resumo

Um corpo bem estabelecido de pesquisas em negócios internacionais examina como o ambiente institucional influencia decisões corporativas. Acrescentamos a esta literatura ao investigar a ligação inexplorada entre família, uma instituição fundamental na sociedade humana, e decisões fiscais corporativas. Aplicando teorias sobre normas sociais e a evolução de fronteiras morais, argumentamos que a força de laços familiares numa sociedade aumenta a evasão fiscal de empresas ao estreitar o escopo de responsabilidades morais. Confirmamos este argumento conduzindo análises de regressão utilizando uma grande amostra de empresas de 44 países. Além disso, o efeito positivo de laços familiares na evasão fiscal é atenuado para empresas em países com instituições políticas inclusivas e amplificado para empresas familiares. Utilizando uma amostra de empresas americanas, descobrimos também que empresas evitam mais impostos quando estão localizadas em estados com laços familiares mais fortes e quando seus CEO são de países com laços familiares mais fortes, indicando que tanto as normas sociais que cercam as empresas como as que são incorporados nos países de origem dos gestores afetam decisões fiscais das empresas. Nosso estudo sugere que a instituição da família fornece uma perspectiva valiosa para compreender as diferenças internacionais em comportamentos corporativos.

摘要

国际商务研究既有文献研究了制度环境如何影响公司决策。我们通过调查家庭 (人类社会的基本制度) 与公司税务决策之间未经探索的联系来补充这一文献。运用社会规范和道德界限演变的理论, 我们认为社会中的家庭关系强度通过缩小道德责任范围使企业避税增加。我们通过使用来自 44 个国家的大量的公司样本进行回归分析来证实这一论点。此外, 家族关系对避税的积极影响对于具有包容性政治制度的国家的企业来说会减弱, 而对家族企业来说则会放大。使用美国公司的样本, 我们还发现, 当公司位于家庭关系较强的州以及首席执行官来自家庭关系较牢固的国家时, 公司会避免更多的税收, 这表明公司周围的社会规范和管理者原籍国的社会规范都会影响公司的税收决策。我们的研究表明, 家庭制度为理解企业行为的国际差异提供了一个有价值的视角。

Appendix

See Table 11.

Table 11 Definitions and sources of key variables