On March 1st, 2019, Michele Fabrizi (University of Padova) presented his current research topic "Criminal Firms and Peer Firm Tax Avoidance: Evidence from a Natural Experiment" (co-authored with Justin Chircop, from Lancaster University Management School, Patrizia Malaspina and Antonio Parbonetti, both from University of Padova) at the WHU Research Seminar in Finance & Accounting.
Using a difference-in-differences approach, the authors examine whether the presence of firms infiltrated by organized crime (criminal firms) influences peer firm tax avoidance activities. Prior literature suggests the presence of organized crime increases the cost of doing business, thereby increasing the marginal benefit of undertaking tax avoidance activities. Conversely, the increase in net assets arising from aggressive tax behavior likely exposes peer firms to greater rent-seeking behavior by criminal firms. Hence, the influence of criminal firms on peer firm tax avoidance is ultimately an empirical question. Using a comprehensive sample of Italian firms identified to have criminal connections and closed down by the Italian police between 2005 and 2016, the authors find that after the removal of the criminally infiltrated firm, peer firms reduce their tax avoidance activities.