Corporate Tax Aggressiveness in the 2007–2008 Financial Crisis

Abstract

This paper examines the impact of the 2007-2008 financial crisis on corporate tax aggressiveness. I hypothesize that, during the crisis, firms adopt more aggressive tax policies to save cash internally as external capital is harder or more costly to obtain because of the tight financial markets. Consistent with the prediction, my findings show that firms exhibited higher levels of tax aggressiveness in the crisis period than in the non-crisis period. I further find that the impact of the crisis on corporate tax aggressiveness was stronger for firms with lower cash holdings (i.e., firms more susceptible to the credit supply shock). Overall, the results suggest that the credit crisis affects firms’ aggressive tax behaviors via its negative impact on their funding ability.