Climate risk and corporate tax avoidance: International evidence

Abstract Research Question/Issue This study investigates the relationship between climate risk and corporate tax avoidance. Previous studies on this relationship generate mixed results, theoretically and empirically. Our study addresses this empirical question by providing new evidence using a large international sample and a novel proxy for climate risk. Research Findings/Insights The empirical results show that higher climate risk is associated with higher tax avoidance. Mechanism analyses show that this positive association is due to the incentive to reserve cash in response to tightened financial constraints, rather than tax deductions granted by governments. This result is more pronounced in countries or regions that have poorer corporate governance and information environments, lower economic development, and a more uncertain policy environment. Theoretical/Academic Implications Our evidence highlights the importance of considering the role of climate risk in corporate tax policies and of comparing the link between climate risk and tax avoidance across countries. Practitioner/Policy Implications Echoing environmental non‐governmental organizations' (NGOs) recent call on governments to strengthen tax administration, our study has policy implications that emphasize the necessity for policymakers to consider the link between climate risk and tax avoidance.