Firm-level political risk and corporate tax avoidance

Mahmud Hossain (), Gerald J. Lobo () and Santanu Mitra ()
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Mahmud Hossain: University of West Georgia
Gerald J. Lobo: University of Houston
Santanu Mitra: Wayne State University

Review of Quantitative Finance and Accounting, 2023, vol. 60, issue 1, No 9, 295-327

Abstract: Abstract This study investigates whether firm-level political risk increases managers’ propensity to avoid taxes. Using a measure of firm-level political risk developed by Hassan et al. (Quart J Econom 134(4):2135–2202, 2019) and several commonly used measures of tax avoidance, we find that corporate tax avoidance increases with firm-level political risk and that the main results hold in various supplemental and endogeneity tests. In cross-sectional tests, we document that the positive relationship between firm-level political risk and tax avoidance is stronger for lower levels of tax avoidance, and is weaker when firms have superior cash flow performance and higher cash holdings. In addition, we show that the positive relationship between firm-level political risk and tax avoidance is stronger during the Trump administration’s trade policy changes as well as during the global financial crisis.

Keywords: Firm-level political risk; Corporate tax avoidance; Change analysis; Cash flow performance; Corporate cash holding (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11156-022-01095-3

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