Abstract

Prior research finds that firms with strong business ethics are less likely to be tax aggressive. Labor union is one of the key stakeholders influencing firm’s tax aggressive behavior, whereas the bargaining process between labor union and firms exhibits ethical dilemma. Although industry-wide labor union coverage is commonly used in prior study to explore the monitoring role of labor unions in constraining management’s aggressive financial and tax decisions of their associated firms, we argue that firm-specific labor unions, which represent a different bargaining power of the employees, do play an important role in determining firms’ tax ethical decisions. Specifically, we examine whether and how the firm-specific labor union coverage impacts firms’ tax aggressiveness decisions over and above industry-wide labor union coverage. We hypothesize and find that firm-specific labor unions influence the associated firms to be more tax aggressive, which results in higher levels of residual cash flows. We also find that industry-wide labor unions influence the associated firms to be less tax aggressive, which is consistent with prior findings. We perform further analyses and find that the results are more pronounced for the firms with greater industry-wide labor unions representation. These results demonstrate that the inclusion of and interaction between the firm-specific and industry-wide labor unions matter in determining corporate’s tax aggressiveness decisions, which highlight firm’s ethical perplexity between tax savings and social commitments.