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The Reputation Effects of Tax Avoidance

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

The effects of tax avoidance news on employee perceptions of managers and firms: Evidence from ratings

Do employees care that their firms avoid paying 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 find out that Apple or Amazon or Google paid 0% of its income in taxes. Our personal tax rates are high, so 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 stay in business. 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 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 that way. 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 used 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 collected ratings on the senior management team and the firm overall via “scraping” techniques. We focused on the largest firms in the country – firms in the Standard &Poor 500 – 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 they don’t like it!” 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, examining 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 under-appreciated stakeholders in the firm.