Diversity of uncertainty and corporate tax avoidance

Abstract

We explore how corporate tax avoidance is influenced by the diversity of uncertainty- a unique dimension of economic policy uncertainty (EPU) that has been surprisingly overlooked. We find that firms facing multiple areas of uncertainty concurrently tend to face heightened risk, prompting them to take precautionary measures and preserve cash through increased tax avoidance strategies. Notably, the effect of EPU diversity on tax avoidance is distinct from the effect of the level of EPU itself. Our study usefully identifies a more nuanced impact of EPU on corporate tax avoidance, offering valuable insights for regulators, policymakers, corporate executives, and investors in general.