Air pollution and corporate tax avoidance

This study investigates the impact of air pollution on corporate tax avoidance aggressiveness. The results indicate that firms in cities with severe air pollution tend to engage in less tax avoidance activities and pay a higher corporate effective tax rate (ETR). Furthermore, the positive impact of air pollution on corporate ETR is less pronounced for firms with big four auditors and entrenched CEOs. The effect is more noticeable for state-owned firms. These empirical findings are robust to a generalized method of moments test, two-stage least squares tests that use thermal inversions as an instrumental variable, and regression discontinuity tests exploiting the China Huai River policy. This study contends that the stronger governmental tax pressures and external monitoring mechanism associated with highly polluting areas mitigates corporate tax avoidance efforts. In addition, the study’s findings are robust to the alternative proxies for air pollution and tax avoidance in the model, and the exclusion of first-tier cities.