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Climate policy uncertainty and corporate tax avoidance

Author

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  • Amin, Md Ruhul
  • Akindayomi, Akinloye
  • Sarker, Md Showaib Rahman
  • Bhuyan, Rafiqul

Abstract

This study examines the relation between climate policy uncertainty and corporate tax avoidance. Using a novel measure of climate policy uncertainty (CPU), we document that CPU is negatively related to effective tax rates for both contemporary and future years. During higher levels of CPU, firms tend to undertake more aggressive forms of tax avoidance, such as long-term tax planning or tax sheltering. Further analysis suggests that the cash savings from lower tax payments are used to pay dividends and not retained for reinvestments. We tackle the endogenous concern with an instrumental variable approach and the firm fixed effect model. Overall, our findings are consistent with the precautionary hypothesis that firms become more conservative in their long-term investment strategies and are risk-averse when there are uncertainties around climate policies.

Suggested Citation

  • Amin, Md Ruhul & Akindayomi, Akinloye & Sarker, Md Showaib Rahman & Bhuyan, Rafiqul, 2023. "Climate policy uncertainty and corporate tax avoidance," Finance Research Letters, Elsevier, vol. 58(PD).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323009534
    DOI: 10.1016/j.frl.2023.104581
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    Cited by:

    1. Sun, Haibo & Bai, Tonghuan & Liu, Zhonglu, 2024. "Perceived policy uncertainty and enterprise greenwashing risk," Finance Research Letters, Elsevier, vol. 69(PA).
    2. Cheng, Shulei & Chen, Yongtao & Wang, Kexin & Jia, Lijun, 2024. "Climate policy uncertainty influences carbon emissions in the semiconductor industry," International Journal of Production Economics, Elsevier, vol. 278(C).
    3. Huang, Qiubin & Kou, Mingting, 2024. "Does climate policy uncertainty impair or improve corporate investment efficiency?," Economics Letters, Elsevier, vol. 244(C).

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    More about this item

    Keywords

    Tax avoidance; Effective tax rate; Dividends; Capital expenditure; Book-tax-difference;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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