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Is there a relation between labor investment inefficiency and corporate tax avoidance?

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  • Taylor, Grantley
  • Al-Hadi, Ahmed
  • Richardson, Grant
  • Alfarhan, Usamah
  • Al-Yahyaee, Khamis

Abstract

This paper investigates the relation between labor investment inefficiency and corporate tax avoidance. Employing a large sample of 61,542 U.S. firm-year observations over the 1962–2014 period, our regression results show that labor investment inefficiency is significantly positively related to tax avoidance. More specifically, we find that a one standard deviation of labor investment inefficiency leads to a 0.71% reduction in the accounting effective tax rate. Our findings are robust to endogeneity concerns, alternative proxy measures of tax avoidance and labor investment efficiency, and additional control variables pertaining to accounting quality and managerial ability. Taken together, our regression results show that labor investment inefficiency is an important determinant of corporate tax avoidance.

Suggested Citation

  • Taylor, Grantley & Al-Hadi, Ahmed & Richardson, Grant & Alfarhan, Usamah & Al-Yahyaee, Khamis, 2019. "Is there a relation between labor investment inefficiency and corporate tax avoidance?," Economic Modelling, Elsevier, vol. 82(C), pages 185-201.
    • Handle: RePEc:eee:ecmode:v:82:y:2019:i:c:p:185-201
    DOI: 10.1016/j.econmod.2019.01.006
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    More about this item

    Keywords

    Firm behavior; Labor investment inefficiency; Corporate tax avoidance;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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