Do natural disasters affect corporate tax avoidance? The case of drought

Natural disaster events such as drought affect the broader economy and inflict adverse consequences for firms because of spill-over effects in an integrated economy. Contrary to the expectation that firms would engage in higher levels of corporate tax avoidance strategies when they experience a negative cash flow shock, we document consistent evidence that firms engage in less corporate tax avoidance when their headquarter states experience drought. Reduced tax avoidance is more pronounced among firms with higher CSR performance and among firms operating in states that experience a GDP decline. Collectively, the findings of our study demonstrate prosocial and ethical behavior of U.S. firms when they experience natural disaster events.