Skip to main content
SpringerLink
Log in

Languages and corporate tax avoidance

  • Published:
Review of Accounting Studies Aims and scope Submit manuscript

Abstract

This paper examines the effect of languages on corporate tax avoidance. We hypothesize and find that managers of firms in countries with languages that grammatically distinguish the future from the present (languages with a strong future time reference or FTR) perceive the potential future tax repayments and penalties to be more distant and therefore engage in more tax avoidance. Further tests exploiting the variation in language FTR within Switzerland and Belgium, which have different official languages in different regions but a single tax system, suggest that our findings are not driven by country-level differences in the tax system. We also provide evidence that U.S. firms with CEOs born in countries with strong FTR languages avoid more taxes than those with CEOs born in weak FTR countries, indicating that it is the CEO’s native tongue that affects tax avoidance. Collectively, our findings highlight the importance of social norms in understanding corporate tax strategies.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. In our model, we assume that corporate managers do not have biases regarding the timing of future rewards and thus language FTR does not affect tax avoidance through the belief channel discussed in the model of Chen (2013). This is one limitation of our model.

  2. Future-time reference was a focal area of the EUROTYP Theme Group on Tense and Aspect, which studied the typological and areal distribution of grammaticalized future-time reference. The resulting working group summarized their findings in an 846-page volume on Tense and Aspect, edited by Osten Dahl (2000). We follow Chen (2013) and adopt a future-time criterion from typological linguistics to separate languages into weak and strong FTR.

  3. Our sample spans from 2003 to 2017 because statutory tax rates in different countries are available in this period from the KPMG Global Tax Rate Survey.

  4. Firms in South Africa are excluded from the sample because the culture control variables are available only for white people, and there are at least 35 languages spoken in South Africa of which 10 are official languages.

  5. Data of Hofstede (2001) are based on surveys of IBM employees in over 70 countries designed to understand differences in corporate culture. Hofstede uses factor analysis to identify four dimensions of cultural variation: individualism, power distance, masculinity, and uncertainty avoidance. The Economic Freedom Index is from a survey published by the Fraser Institute (www.fraserinstitute.org).

  6. Bertrand et al. (2004) show that clustered standard errors have a downward-biased component when the number of clusters is less than 50 and that this downward bias asymptotically disappears when the number of groups is larger than 50. Because our sample contains observations from 36 countries, we expect our results to be less subject to the downward bias concern documented by Bertrand et al. (2004) when the standard errors are clustered at the firm level.

  7. We show in Table 4 that the relation between TaxAvoidance and ROA is positive when we control for the cross-country variation in the number of observations using the country-industry-year regression.

  8. The Compustat Global database reports firms’ current headquarters. Thus it is likely that some firms in our sample changed the headquarters location during the sample period, and the location changes are associated with changes in the official language. To mitigate this concern, we manually checked the headquarters locations of each firm in our Swiss sample and Belgian sample in Google and Wikipedia. If firms do not change the headquarters locations during the sample period, we keep the location as reported by the Compustat Global database. If firms changed the headquarters location during the sample period, we replaced the headquarters location before the change reported by the Compustat Global database with the one that we collected from Google and Wikipedia.

  9. We use cash effective tax rate (Cash ETR) and GAAP effective tax rate (GAAP ETR) to compare tax avoidance for firms in the same country. The results for Swiss firms also hold if we use TaxAvoidance to measure tax avoidance (untabulated).

  10. As the sample size is relatively small, our tests do not have enough power to detect significant relations between tax avoidance and firm characteristics other than ROA.

  11. To save space, we report the coefficients on control variables in Table OA1 of the online appendix.

  12. To save space, we report the coefficients on control variables in Table OA2 of the online appendix.

  13. To save space, we report the coefficients on control variables in Table OA3 of the online appendix.

  14. Debt and equity financing could be also used as tax avoidance strategies, e.g., stock options and deferred compensation that generate tax savings, and debt as tax shield. Therefore theoretical relations between tax avoidance and changes in debt and equity are ambiguous.

  15. We use changes in debt and equity positions, because individual components of debt and equity financing, such as debt issuances, debt repayment, equity issuances, and share repurchases are missing for a substantial proportion (50% to 80%) for the observations in our main sample.

References

  • Acemoglu, D., and J. Robinson. 2015. The rise and decline of general laws of capitalism. Journal of Economic Perspectives 29 (1): 3–28.

    Article  Google Scholar 

  • Alesina, A., and P. Giuliano. 2015. Culture and institutions. Journal of Economic Literature 53 (4): 898–944.

    Article  Google Scholar 

  • Armstrong, C.S., J.L. Blouin, and D.F. Larcker. 2012. The incentives for tax planning. Journal of Accounting and Economics 53 (1–2): 391–411.

    Article  Google Scholar 

  • Armstrong, C.S., J.L. Blouin, A. Jagolinzer, and D.F. Larcker. 2015. Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics 60 (1): 1–17.

    Article  Google Scholar 

  • Atwood, T.J., M.S. Drake, and L.A. Myers. 2010. Book-tax conformity, earnings persistence and the association between earnings and cash flows. Journal of Accounting and Economics 50 (1): 111–125.

    Article  Google Scholar 

  • Atwood, T.J., M.S. Drake, J.N. Myers, and L.A. Myers. 2012. Home country tax system characteristics and corporate tax avoidance: International evidence. The Accounting Review 87: 1831–1860.

    Article  Google Scholar 

  • Badertscher, B.A., J.J. Burks, and P.D. Easton. 2011. A convenient scapegoat: Fair value accounting by commercial banks during the financial crisis. The Accounting Review 87 (1): 59–90.

    Article  Google Scholar 

  • Badertscher, B.A., S. Katz, and S. Rego. 2013. The separation of ownership and control and corporate tax avoidance. Journal of Accounting and Economics 56 (2–3): 228–250.

    Article  Google Scholar 

  • Badertscher, B.A., S. Katz, S. Rego, and R. Wilson. 2019. Conforming tax avoidance and capital market pressure. The Accounting Review 94 (6): 1–30.

  • Bankman, J. 2004. The tax shelter battle. The Crisis in Tax Administration 9: 13.

    Google Scholar 

  • Bertrand, M., E. Duflo, and S. Mullainathan. 2004. How much should we trust differences-in-differences estimates? The Quarterly Journal of Economics 119 (1): 249–275.

    Article  Google Scholar 

  • Bertrand, M., and A. Schoar. 2003. Managing with style: The effect of managers on firm policies. The Quarterly Journal of Economics 118 (4): 1169–1208.

    Article  Google Scholar 

  • Bisin, A., and T. Verdier. 2001. The economics of cultural transmission and the dynamics of preferences. Journal of Economics Theory 97 (2): 298–319.

    Article  Google Scholar 

  • Boroditsky, L. 2001. Does language shape thought? Mandarin and English speakers’ conceptions of time. Cognitive Psychology 43 (1): 1–22.

    Article  Google Scholar 

  • Cen, L., E.L. Maydew, L. Zhang, and L. Zuo. 2017. Customer-supplier relationships and corporate tax avoidance. Journal of Financial Economics 123 (2): 377–394.

    Article  Google Scholar 

  • Chang, X., S. Dasgupta, G. Wong, and J. Yao. 2014. Cash-flow sensitivities and the allocation of internal cash flow. Review of Financial Studies 27 (12): 3628–3657.

    Article  Google Scholar 

  • Chen, M. 2013. The effect of language on economic behavior: Evidence from savings rates, health behaviors, and retirement assets. American Economic Review 103 (2): 690–731.

    Article  Google Scholar 

  • Chen, S., X. Chen, Q. Cheng, and T. Shevlin. 2010. Are family firms more tax aggressive than non-family firms? Journal of Financial Economics 95 (1): 41–61.

    Article  Google Scholar 

  • Chen, S., Y. Huang, N. Li, and T.J. Shevlin. 2019. How does quasi-indexer ownership affect corporate tax planning? Journal of Accounting and Economics 67 (2–3): 278–296.

    Article  Google Scholar 

  • Chi, S., S.X. Huang, and J. Sanchez. 2017. CEO inside debt incentives and corporate tax sheltering. Journal of Accounting Research 55 (4): 837–876.

    Article  Google Scholar 

  • Chyz, J.A. 2013. Personally tax aggressive executives and corporate tax sheltering. Journal of Accounting and Economics 56 (2): 311–328.

    Article  Google Scholar 

  • Crocker, K., and J. Slemrod. 2005. Corporate tax evasion with agency costs. Journal of Public Economics 89 (9): 1593–1610.

    Article  Google Scholar 

  • Dahl, O. 2000. The grammar of future time reference in European languages. In Tense and aspect in the languages of Europe, ed. Osten Dahl, 309–328. Berlin: Mouton de Gruyter.

    Chapter  Google Scholar 

  • DeBacker, J., B. Heim, and A. Tran. 2015. Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States. Journal of Financial Economics 117 (1): 122–138.

    Article  Google Scholar 

  • Dechow, P.M., R.G. Sloan, and A.P. Sweeney. 1995. Detecting earnings management. The Accounting Review 70 (2): 193–225.

    Google Scholar 

  • Demerjian, P., B, Lev., and S. McVay. 2012. Quantifying managerial ability: A new measure and validity tests. Management Science 58(7), 1229–1248.

  • Desai, M.A., and D. Dharmapala. 2006. Corporate tax avoidance and high-powered incentives. Journal of Financial Economics 79 (1): 145–179.

    Article  Google Scholar 

  • Dittmar, A., and R. Duchin. 2016. Looking in the rearview mirror: The effect of managers’ professional experience on corporate financial policy. Review of Financial Studies 29 (3): 565–602.

    Google Scholar 

  • Doepke, M., and F. Zilibotti. 2017. Parenting with style: Altruism and paternalism in intergenerational preference transmission. Quarterly Journal of Economics 85 (5): 1331–1371.

    Google Scholar 

  • Dyreng, S.D., M. Hanlon, and E.L. Maydew. 2008. Long-run corporate tax avoidance. The Accounting Review 83 (1): 61–82.

    Article  Google Scholar 

  • Dyreng, S.D., M. Hanlon, and E.L. Maydew. 2010. The effects of executives on corporate tax avoidance. The Accounting Review 85 (4): 1163–1189.

    Article  Google Scholar 

  • Dyreng, S.D., W.J. Mayew, and C.D. Williams. 2012. Religious social norms and corporate financial reporting. Journal of Business Finance & Accounting 39 (7–8): 845–875.

    Article  Google Scholar 

  • Edwards, A., C. Schwab, and T. Shevlin. 2016. Financial constraints and cash tax savings. The Accounting Review 91 (3): 859–881.

    Article  Google Scholar 

  • Ellahie, A., A. Tahoun, and I. Tuna. 2017. Do common inherited beliefs and values influence CEO pay? Journal of Accounting and Economics 64 (2–3): 346–367.

    Article  Google Scholar 

  • Falk, A., A. Becker, T. Dohmen, B. Enke, B. Huffman, and U. Sunde. 2018. Global evidence on economic preferences. Quarterly Journal of Economics 133 (4): 1645–1692.

    Article  Google Scholar 

  • Fernandez, R., 2011, Does culture matter? In J. Benhabib, M. O. Jackson and A. Bisen, eds., Handbook of Social Economics, Vol. 1A, North-Holland.

  • Frank, M.M., L. Lynch, and S. Rego. 2009. Tax reporting aggressiveness and its relation to aggressive financial reporting. The Accounting Review 84 (2): 467–496.

    Article  Google Scholar 

  • Gaertner, F. 2014. CEO after-tax compensation incentives and corporate tax avoidance. Contemporary Accounting Research 31 (4): 1077–1102.

    Article  Google Scholar 

  • Graham, J. R., M. Hanlon, T. Shevlin, and N. Shroff. 2014. Incentives for tax planning and avoidance: Evidence from the field. Accounting Review 89(3), 991–1023.

  • Guenther, D.A., S.R. Matsunaga, and B.M. Williams. 2016. Is tax avoidance related to firm risk? The Accounting Review 92 (1): 115–136.

    Article  Google Scholar 

  • Guenther, D.A., K. Njoroge, and B.M. Williams. 2020. Allocation of internal cash flow when firms pay less tax. The Accounting Review 95 (5): 185–210.

    Article  Google Scholar 

  • Guiso, L., P. Sapienza, and L. Zingales. 2006. Does culture affect economic outcomes? Journal of Economic Perspectives 20 (2): 23–48.

    Article  Google Scholar 

  • Hall, R.E., and C.I. Jones. 1999. Why do some countries produce so much more output per worker than others? Quarterly Journal of Economics 114 (1): 83–116.

    Article  Google Scholar 

  • Han, S., T. Kang, and S. Salter. 2010. A cross-country study on the effects of national culture on earnings management. Journal of International Business Studies 41 (1): 123–141.

    Article  Google Scholar 

  • Hanlon, M., and S. Heitzman. 2010. A review of tax research. Journal of Accounting and Economics 50 (2): 127–178.

    Article  Google Scholar 

  • Hanlon, M., and J. Slemrod. 2009. What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement. Journal of Public Economics 93 (1): 126–141.

    Article  Google Scholar 

  • Hasan, I., C.K.S. Hoi, Q. Wu, and H. Zhang. 2014. Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans. Journal of Financial Economics 113 (1): 109–130.

    Article  Google Scholar 

  • Hauk, E., and M. Saez Marti. 2002. On the cultural transmission of corruption. Journal of Economic Theory 107 (2): 311–335.

    Article  Google Scholar 

  • Heckman, J.J., and S. Mosso. 2014. The economics of human development and social mobility. Annual Review of Economics 6 (1): 689–733.

    Article  Google Scholar 

  • Hofstede, G. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations across nations. Second ed. Thousand Oaks: Sage Publications.

  • Hoi, C. K, Q. Wu, and H. Zhang. 2013. Is corporate social responsibility (CSR) associated with tax avoidance? Evidence from irresponsible CSR activities. The Accounting Review 88(6): 2025–2059.

  • Hoi, C. K, Q. Wu, and H. Zhang. 2017. Does social capital matter in corporate decisions? Evidence from Corporate Tax Avoidance 55 (3): 629-668.

  • Hoopes, J., D. Mescall, and J. Pittman. 2012. Do IRS audits deter corporate tax avoidance? The Accounting Review 87 (5): 1603–1639.

    Article  Google Scholar 

  • Jakobson, R., and M. Halle. 1956. Fundamentals of languages. The Hague: Mouton and Company.

    Google Scholar 

  • Khan, M., S. Srinivasan, and L. Tan. 2017. Institutional ownership and corporate tax avoidance: New evidence. The Accounting Review 92 (2): 101–122.

    Article  Google Scholar 

  • Kim, Jaehyeon, Y. Kim, and J. Zhou. 2017. Languages and earnings management. Journal of Accounting and Economics 63 (2–3): 288–306.

    Article  Google Scholar 

  • Kim, J.B., Y. Li, and L. Zhang. 2011. Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of Financial Economics 100 (3): 639–662.

    Article  Google Scholar 

  • Koester, A., T. Shevlin, and D. Wangerin. 2016. The role of managerial ability in corporate tax avoidance. Management Science 63 (10): 3285–3310.

    Article  Google Scholar 

  • La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R.W. Vishny. 1998. Law and finance. Journal of Political Economy 106 (6): 1113–1155.

    Article  Google Scholar 

  • La Porta, R., F. Lopez-de-Silanes, and A. Shleifer. 2008. The economic consequences of legal origins. Journal of Economic Literature 46 (2): 285–332.

    Article  Google Scholar 

  • Law, K.K., and L.F. Mills. 2015. Taxes and financial constraints: Evidence from linguistic cues. Journal of Accounting Research 53 (4): 777–819.

    Article  Google Scholar 

  • Law, K.K., and L.F. Mills. 2017. Military experience and corporate tax avoidance. Review of Accounting Studies 22 (1): 141–184.

    Article  Google Scholar 

  • Law, K. K., and L. Zuo. 2020. How does the economy shape the financial advisory profession? Management Science, forthcoming.

  • Li, Q., E. Maydew, R. Willis, and L. Xu. 2017. Corporate tax behavior and political uncertainty: Evidence from national elections around the world. Working paper.

  • Liang, H., C. Marquis, L. Renneboog, and S.L. Sun. 2018. Future-time framing: The effect of language on corporate future orientation. Organization Science 29 (6): 1093–1111.

    Article  Google Scholar 

  • Malmendier, U., G. Tate, and J. Yan. 2011. Overconfidence and early-life experiences: The effect of managerial traits on corporate financial policies. The Journal of Finance 66 (5): 1687–1733.

    Article  Google Scholar 

  • McGuire, S., D. Wang, and R. Wilson. 2014. Dual class ownership and tax avoidance. The Accounting Review 89 (4): 1487–1516.

    Article  Google Scholar 

  • Mills, L.F. 1998. Book-tax differences and internal revenue service adjustments. Journal of Accounting Research 36 (2): 343–356.

    Article  Google Scholar 

  • North, D.C. 1990. Institutions, institutional change and economic performance. Cambridge and New York: Cambridge University Press.

    Book  Google Scholar 

  • North, D.C. 1994. Economic performance through time. The American Economic Review 84 (3): 359–368.

    Google Scholar 

  • Rego, S., and R. Wilson. 2012. Equity risk incentives and corporate tax aggressiveness. Journal of Accounting Research 50 (3): 775–810.

    Article  Google Scholar 

  • Robinson, J. R., Y. Xue, and M. H. Zhang. 2012. Tax planning and financial expertise in the audit committee. Working paper.

  • Roychowdhury, S. 2006. Earnings management through real activities manipulation. Journal of Accounting and Economics 42 (3): 335–370.

    Article  Google Scholar 

  • Schoar, A., and L. Zuo. 2017. Shaped by booms and busts: How the economy impacts CEO careers and management styles. Review of Financial Studies 30 (5): 1425–1456.

    Article  Google Scholar 

  • Shevlin, T., O. Urcan, and F. Vasvari. 2013. Corporate tax avoidance and public debt costs. Working paper.

  • Slemrod, J. 2004. The economics of corporate tax selfishness. National Tax Journal 57 (4): 877–899.

    Article  Google Scholar 

  • Slobin, D. I. 1987. September. Thinking for speaking. In Annual Meeting of the Berkeley Linguistics Society 13: 435–445.

  • Sutter, M., S. Angerer, D. Rützler, and P. Lergetporer. 2015. The effect of language on economic behavior: Experimental evidence from children’s intertemporal choices. Working paper.

  • Tabellini, G. 2008. The scope of cooperation: Values and incentives. Quarterly Journal of Economics 123 (3): 905–950.

    Article  Google Scholar 

  • Thieroff, R. 2000. On the areal distribution of tense-aspect categories in Europe. In Tense and aspect in the languages of Europe, ed. Osten Dahl, 309–328. Berlin: Mouton de Gruyter.

    Google Scholar 

  • Whorf, B.L. 1956. In Language, thought, and reality: Selected writings of Benjamin lee Whorf, ed. John B. Carroll. Cambridge: MIT Press.

    Google Scholar 

  • Williamson, O.E. 2000. The new institutional economics: Taking stock, looking ahead. Journal of Economic Literature 38 (3): 595–613.

    Article  Google Scholar 

  • Wilson, R. 2009. An examination of corporate tax shelter participants. The Accounting Review 84 (3): 969–999.

    Article  Google Scholar 

  • Zimmerman, J.L. 1983. Taxes and firm size. Journal of Accounting and Economics 5: 119–149.

    Article  Google Scholar 

Download references

Acknowledgements

We are grateful to Jennifer Blouin (the editor) and an anonymous referee for many insightful comments and suggestions that helped us significantly improve the paper. We also thank Vedran Capkun, Mary Ellen Carter, Michael Dambra, Mark Defond, Luzi Hail, Shane Heitzman, Kai Wai Hui, Alan Jagolinzer, Kelvin Law, Jing Li, Mark Ma, Shiheng Wang (discussant), Xin Wang, Franco Wong, Joanna Wu, Eric Yeung, Jerry Zimmerman and seminar participants at Huazhong University of Science and Technology, The University of Hong Kong, and the 2018 MIT Asia Conference in Accounting for helpful comments and suggestions

Author information

Authors and Affiliations

  1. Cheung Kong Graduate School of Business, Beijing, China

    Ke Na

  2. Department of Accounting, Nanjing University, Nanjing, China

    Wenjia Yan

Authors
  1. Ke Na
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Wenjia Yan
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ke Na.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Supplementary Information

ESM 1

(TEX 18 kb)

ESM 2

(DOCX 62 kb)

Appendix

Appendix

Table 9
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Na, K., Yan, W. Languages and corporate tax avoidance. Rev Account Stud 27, 148–184 (2022). https://doi.org/10.1007/s11142-021-09596-7

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11142-021-09596-7

Keywords

JEL

Search

Navigation