You are here

The reputation effects of tax avoidance news: Evidence from ratings

Dr. Yoojin Lee is an Assistant Professor in Accountancy. Below is a brief summary of her recent research.

Do employees care that their firms avoid taxes? That’s the general question I ask in a paper co-authored with Shaphan Ng, Terry Shevlin and Aruhn Venkat (all at UC Irvine). Generally, average Americans don’t think it’s very fair when they read the news and find out that Apple or Amazon or Google paid 0% of its income in taxes. Our personal tax rates are high, why are the most profitable companies escaping taxation? That doesn’t seem fair to most of us.

But it’s not clear that employees feel the same way. On the one hand, employees are just like the rest of us: they agree that income inequality isn’t fair and probably don’t think it’s fair that their employers pay no taxes while they pay a lot. On the other hand, employees might benefit when their employers don’t pay any taxes: that might mean higher salaries for them because their employer is more profitable. In extreme circumstances, their company might need to avoid taxes to remain solvent and functioning. If that’s the case, employees might want their firms to avoid taxes so that they don’t lose their jobs!

We seek to address this question using two unique data sources. First, we collect hand-collected news about firms’ tax avoidance from various news sources in the LexisNexis database. We think tax news brings firms’ tax avoidance to the attention of the public and employees. As accountants, we know that publicly-traded firms disclose their tax expense in their income statements. However, most employees aren’t accountants and probably don’t read annual reports. So, they probably don’t learn about their firms’ tax avoidance from the tax expense in annual reports. News sources, like the Wall Street Journal and New York Times, seem more appropriate. Most people receive the news one way or another. Not everyone reads the newspaper or news websites but we all know someone who does. When your employer is in the news for avoiding taxes, you probably find out about that either directly or from friends or colleagues.

Second, we use web “scraping” packages in the Python programming language to “scrape” employee ratings and reviews from is a site where employees can anonymously review their employers, post salary information, etc. We collect ratings on the senior management team and the firm overall via “scraping” techniques. We focus on the largest firms in the country – firms in the S&P500 - because they get the most attention in the media. Tying all this together, our research design essentially asks: how do employee ratings change following news about firms’ tax avoidance?

Our results are pretty clear. Employees react negatively to news that their firms avoided taxes. When there are more articles about the tax avoidance activity, they respond even more negatively. Employees at high-performing firms seem to respond less negatively - likely because they are happy with their employers’ performance. We also find that employees at firms in consumer-facing industries respond more negatively - possibly because they are generally store clerks, waiters, etc. and don’t benefit from tax avoidance or may not understand the benefits of tax avoidance. Perhaps our most fascinating finding is that we find that employees actually discuss taxes more frequently in the text of their reviews following tax avoidance news.

So the answer is “yes, employees do care that their firms avoid taxes, and not in a good way!” Overall, our research is unique in that we provide some evidence on how rank-and-file employees respond to their firms’ tax avoidance. Prior studies are generally concerned with other stakeholders. For example, various studies examine how shareholders or creditors or boards of directors or even consumers respond to tax avoidance and tax avoidance news. We instead focus on employees because employees matter for the success and performance of a firm. We hope that our paper stimulates more work on employee perceptions, as we think employees are an under-appreciated stakeholder in the firm.