The Effect of Firm-Level Political Risk on Tax Avoidance

This study investigates the impact of firm-level political risk on corporate tax avoidance and finds strong evidence that firms reduce tax avoidance activity in the presence of heightening firm-level political risk. This relation is robust to measures used to address endogeneity concerns and absolved accrual managements. The subsample analysis shows that US firms are more tax-sensitive to heterogenous political risk, compared to firms in countries mandated by the IFRS system. Further analysis reveals that the motivation for tax compliance under political pressure is stronger for financially unconstrained firms, socially responsible firms, and high market power firms. Overall, the findings contribute to the existing literature on political risk and tax avoidance in several meaningful ways and further highlight the importance of political risk at the firm level