Terror and taxes: how attacks impact corporate tax avoidance

Abstract

Purpose The purpose of this study is to examine the effect of terrorist attacks on tax avoidance. Further, the authors identify the possible channel leading to our main result and examine the role of social pressure. Design/methodology/approach Data pertaining to terrorist attacks within the USA are procured from the Global Terrorism Database. The final sample consists of 45,524 firm-year observations from 1993 to 2017. The methodology uses ordinary least squares regressions. Findings The authors find that firms located in close proximity to terrorist attacks (i.e. impact firms) significantly decrease their tax avoidance practices after the attacks. The authors further find that these impact firms are willing to pay more taxes post attack when their headquarters are located in higher social capital regions. Originality/value Studies have mainly focused on the macroeconomic effects of terrorism, and only recently have researchers shifted their focus to firm-level impacts. The authors provide strong evidence that extends the second line of the literature by exploring corporate tax activities attributed to terrorist events.