This study examines whether socially responsible firms behave differently from other firms in their financial reporting. Specifically, we question whether firms that are better in their corporate social responsibility (CSR) performance also behave in a responsible manner to maintain their financial reporting quality and whether the market rewards such responsible behaviors. Using data from S&P 500 US companies, we find that socially responsible firms are less likely to manage their earnings. However, we fail to find significant relationships between CSR and investors' perceptions on earnings, measured by stock returns and earnings response coefficient. We interpret the results as investors not fully reflecting the benefits from CSR performance. Our findings are consistent with the notion that CSR activities are motivated by managers' ethical incentives to serve the interests of stakeholders.

There is a debate in academia and the business world on whether tax payments should be considered part of firms’ social responsibility. Existing literature provides conflicting evidence on the relationship between corporate tax payments and corporate social responsibility (CSR). Borrowing a concept from a behavioral theory of the firm (BTOF), this study attempts to present a more refined model on the relationship between the two. The results in this study reveal that as firms’ performance rises further above their aspiration level, they are less likely to show better CSR performances and are also less likely to avoid taxes. Firms performing just above their aspiration level show higher CSR performances and firms performing nearby (both below and above) their aspiration level avoid more taxes. In conclusion, firms’ CSR and tax payment decisions are related to the desire to meet or beat an aspiration level or sustain competitive advantage than being ethical or unethical. JEL CLASSIFICATION M14; H26

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The current study examines whether performance discrepancy from the aspiration level affects corporate tax avoidance. Prior studies show that performance discrepancies from the aspiration level significantly affect firms' behavior; thus, it is important to examine whether such discrepancies affect corporate tax avoidance. Based on the behavioral theory of the firm (BTOF), this study posits that firms performing below the aspiration levels avoid more taxes in the subsequent period than other firms. Empirical findings using data from a sample of U.S. firms for the period covering 1993-2016 support the hypothesis. The findings also show that, while there is a difference among firms meeting or beating the aspiration level, there is no statistically significant difference in tax avoidance level among firms performing short of their aspiration level. The study contributes to the existing literature by providing additional evidence extending the scope of literature in BTOF and tax avoidance areas.