Does Corporate Culture Impact Tax Behavior: Machine Learning Approach

Abstract

This study investigates whether corporate culture of a firm impacts its tax shelter behavior. We use novel machine learning methodology to measure corporate culture of a firm. The analyses show that firms with stronger corporate culture are more likely to engage in tax shelter behavior and extent of such behavior is greater in these firms. The findings also suggest that firms with stronger corporate culture engage in greater tax avoidance, which is a less controversial corporate behavior compared to tax shelter activities. The results continue to hold when we implement battery of tests to address endogeneity issues (e.g., two-stage least squares methodology and difference-in-difference analysis). Finally, we determine that engaging in tax shelter behavior as a result of stronger corporate culture increases a firm’s after-tax earnings in future periods.