Institutional Corruption, ESG, and Corporate Tax Behavior: Evidence from MENA Economies

Weak institutional environments may encourage aggressive corporate tax practices, but firms’ responses can vary depending on the strength of their internal governance. This study examines the relationship between perceived corruption risk and corporate tax avoidance and investigates whether firm-level environmental, social, and governance (ESG) performance moderates this relationship. Using an unbalanced panel of 921 publicly listed firms, comprising 7628 firm-year observations across 11 Middle East and North Africa (MENA) economies from 2013 to 2024, the study employs fixed-effects panel regressions alongside several robustness checks. The findings indicate that greater perceived corruption risk is associated with higher corporate tax avoidance, while stronger ESG performance significantly weakens this association. Subsample analyses also reveal positive CORRISK × ESG interaction coefficients in both higher- and lower-corruption economies, with a larger estimated coefficient in the higher-corruption group. The main findings remain broadly consistent when using an alternative measure of tax avoidance, two-step System GMM, additional firm- and country-level controls, and alternative fixed-effects specifications. However, the country-level corruption measure reflects the broader institutional environment rather than firms’ direct exposure to corruption, which should be considered when interpreting the results. Overall, the study highlights the potential role of firm-level ESG in mitigating the relationship between perceived corruption risk and aggressive corporate tax behavior, emphasizing the importance of considering both institutional conditions and corporate governance practices in MENA economies.