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Advertising and tax avoidance

Author

Listed:
  • Sattar Mansi

    (Virginia Tech)

  • Jianping Qi

    (University of South Florida)

  • Han Shi

    (Greenville University)

Abstract

We examine the link between firms’ advertising and their tax avoidance. By generating customer awareness, advertising helps shape firm image and reputation among customers. Such benefits of advertising would diminish if the firm is viewed as a greedy tax dodger. Greater customer awareness generated by higher advertising spending also increases the likelihood that customers would find out tax-aggressive behaviors of the firm. Thus, firms that spend more on advertising may want to be less tax-aggressive. Consistent with this argument, we find that firms with a greater extent of advertising spending have fewer tax-sheltering activities, smaller book-tax differences, and higher cash-effective tax rates. The negative effect of advertising on tax avoidance is stronger for firms that are less known, more opaque, or that have lower institutional holdings. We control for other factors affecting tax avoidance, including corporate governance and social responsibility ratings. We also use the instrumental variable method, propensity score matching, and change regressions to address endogeneity concerns. Our results remain statistically and economically significant.

Suggested Citation

  • Sattar Mansi & Jianping Qi & Han Shi, 2020. "Advertising and tax avoidance," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 479-516, February.
    • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:2:d:10.1007_s11156-019-00796-6
    DOI: 10.1007/s11156-019-00796-6
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    References listed on IDEAS

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    2. Kumari Juddoo & Issam Malki & Sudha Mathew & Sheeja Sivaprasad, 2023. "An impact investment strategy," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 177-211, July.

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    More about this item

    Keywords

    Advertising; Tax avoidance; Reputation; Informational opacity;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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