Geopolitical risk, financial constraints, and tax avoidance

Abstract

We investigate the impact of geopolitical risk on corporate tax avoidance using a sample of all public US firms from 2005 to 2019. We find that an increase in geopolitical risk leads to higher engagement in corporate tax avoidance, as measured by a decline in cash-effective tax rates in both the short run and long run. This effect is more pronounced for firms with higher financial constraints. Furthermore, using the 2016 OPEC agreement as a geopolitical shock, we find that oil-related firms engaged in more aggressive tax avoidance activities than their non-oil-related counterparties. Our findings are robust to an alternative measure of industry exposure.