This study examines the relationship between business ethics and tax aggressiveness. Building on the\nconceptual model of corporate moral development, we hypothesize and find a negative association between the level\nof business ethics and tax aggressiveness. For our sample of U.S. firms, companies with a higher level of business\nethics are less likely to be tax aggressive. Our results are robust to the use of two proxies for tax aggressiveness: the\nââ?¬Ë?mainstreamââ?¬â?¢ effective-tax-rate measure and the unrecognized tax benefit, which have been identified as capturing the\nleast and the most aggressive tax positions respectively. While we support our business ethics prediction in both our\nmodels, we also find a positive relationship between the quality of corporate governance (measured without ethical\ncharacteristics generally associated with good corporate governance) and tax aggressiveness. Our interpretation of\nthese results is that, while ethical firms are concerned about paying their fair share of taxes, shareholdersââ?¬â?¢ interest\nstill comes first.
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