Is Corporate Tax Avoidance Related to Employee Treatment?

This paper investigates the empirical association between corporate tax avoidance and employee treatment. Using both aggressive and innocuous tax avoidance measures and MSCI ESG’s “Employee Relations” dimension, we provide strong evidence of a positive relationship between the two constructs. Our findings are robust to various measures of corporate tax avoidance and employee treatment. Our testing also indicates that the positive relationship is driven by the “strengths” dimension of employee treatment for risky tax avoidance and “concerns” for innocuous tax avoidance. Taken together, our study’s results are consistent with the theories of labor incidence and compensating differentials and suggest that employees require a compensation premium for bearing the increased financial risks resulting from CTA.