Examining the effect of tax avoidance on ESG performance: moderating role of audit fees

Purpose This study explores the effect of corporate tax avoidance (TA) on environmental, social, and governance performance (ESG_P), emphasizing the moderating role of audit fees (AF). While TA can provide financial flexibility to support sustainability initiatives, it also raises concerns about ethical conduct and transparency. The study seeks to clarify whether TA promotes or undermines ESG outcomes and how audit quality, as reflected in AF, influences this relationship. Design/methodology/approach The analysis is based on 602 firm-year observations from FTSE 100 non-financial companies over the period 2014–2022. Using a panel data regression framework, the study examines both the direct impact of TA on ESG_P and the moderating effect of AF. To address potential endogeneity and enhance the robustness of the findings, a dynamic panel estimation approach (system GMM) is employed, supported by comprehensive diagnostic and robustness tests. Findings The results reveal a significant positive association between TA and ESG_P, suggesting that firms may reinvest tax savings into sustainability-related initiatives. However, this relationship weakens under higher AF, indicating that stronger audit scrutiny limits opportunistic tax behavior and enhances corporate transparency. Originality/value This study contributes to the growing literature on corporate sustainability by revealing the dual nature of TA, both as a potential driver of ESG investment and as a governance risk. By incorporating AF as a moderating factor, the research provides novel evidence on how external audit quality can align tax strategies with authentic sustainability objectives.