Natural disaster, fiscal pressure and tax avoidance: a typhoon-based study

Abstract

Natural disasters affect not only local economic development and government fiscal behaviour at the macro level, but also corporate tax avoidance behaviour at the micro level. From the perspective of typhoons, we investigate the effect of natural disasters on corporate tax avoidance behaviour based on the sample of China’s A-share companies from 2008 to 2015. Results indicate that the greater the damage caused by typhoons, the lower the level of tax avoidance of local companies, and this relationship is more significant in state-owned companies, political affiliates, and local leading companies, which is joined with path testing to show that natural disaster affects tax avoidance through fiscal pressure. In addition, we investigate whether this relationship varies cross-sectionally from several perspectives: institutional and economic environment, fiscal pressure, market pressure, and tax avoidance margin. Furthermore, we find that companies paying more taxes post-disaster will obtain more government grants and credit resources in the future, achieving mutual benefits between local governments and companies. In summary, this paper tests the effect of disasters on corporate tax avoidance behaviour based on China’s unique government-company relationship.