ABSTRACT
We examine the impact of political uncertainty on corporate tax avoidance. Covering presidential elections in U.S. (1993-2017), we investigate the effect of political affiliation and transition of power on corporate tax avoidance. We find that firms are engaging in corporate tax avoidance activities, one year before and over the election years. We explore these firm's possible channels of spending and show that firms are spending more on capital expenditures and dividends in pre-election and over the election years. Furthermore, we find that when Republican presidents are in office, there are less corporate tax avoidance activities. We observe an increase in corporate tax avoidance activities when there is a transition of power from Democrats to Republicans and vice versa. We also covered gubernatorial elections in all 50 states during 1993-2017. We find that firms headquartered in NY, CA and TX increase their corporate tax avoidance activities over the gubernatorial election periods.
Keywords
corporate tax avoidance; political uncertainty; leverage; cash effective tax rate; political affiliation; transition of power; pre-election; post-election; presidential elections; gubernatorial elections.