The impact of labor unions on corporate tax avoidance: Evidence from Korea

Ilhang Shin, Sorah Park

Research output: Contribution to journalReview articlepeer-review

Abstract

This study examines the effect of labor unions on corporate tax avoidance activities. Labor union is an important stakeholder in terms of corporate governance; thus, managers may engage in certain accounting choices that reflect union members' position to improve the relation with labor union. This paper empirically investigates whether managers engage in tax avoidance activities to secure financial resources for workers' pay when the negotiation power of labor unions is higher. The empirical analysis is based on a sample of firms listed in the Korean stock market from 2001 to 2008. The authors find that companies, where labor unions are organized, have a significantly higher level of tax avoidance activities. Also, the authors attempt to examine the effect of labor unions' bargaining power on tax avoidance. While the union membership ratio is not significantly related to tax avoidance, labor unions that belong to upper-level labor organizations significantly affect the increasing tax avoidance activity, on average. Moreover, companies that join an aggressive labor organization ('Minju' Federation) show a significantly higher level of tax avoidance activity, compared to those joining a moderate labor organization ('Hanguk' Federation). Furthermore, the authors show that such an effect of labor unions on tax avoidance is significant for companies, which are not affiliated with large business groups ('chaebols'). This result suggests that chaebol group management is not under pressure to negotiate with union members due to higher reputation costs. The findings of this paper offer academic and practical implications that capital market participants need to understand labor unions' effect on management's accounting choices.

Original languageEnglish
Pages (from-to)114-127
Number of pages14
JournalProblems and Perspectives in Management
Volume18
Issue number2
DOIs
StatePublished - 15 May 2020

Bibliographical note

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Keywords

  • Accounting choice
  • Chaebols
  • Corporate governance
  • Labor union
  • Tax avoidance

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