Firms' Environmental, Social, and Governance Performance and Tax Avoidance: Evidence From China

ABSTRACT This study analyses the relationship between firms' environmental, social, and governance (ESG) performance and corporate tax avoidance. We use a sample of Chinese firms listed on the A‐share market from 2009 to 2019 and find that compared with firms with worse ESG performance, those with better ESG performance tend to have a higher level of tax avoidance. This finding is interpreted through a novel strategic finance perspective rather than an ethical lens, which highlights tax planning as a legitimate financial strategy rather than opportunistic evasion. This positive effect increases with firms' financial constraints and decreases with firms' profitability and government pressure. In addition, we document that a firm's ownership structure and political connection play a significant moderating role in the relationship between its ESG performance and tax avoidance. Furthermore, we find that compared with firms with worse ESG performance, firms with better ESG performance are more likely to manage their tax levels within a legitimate threshold and hire tax experts to serve in their top management teams to achieve their strategic goals.