Terrorism and Corporate Tax Avoidance.

We examine the impact of terrorism risk on corporate tax avoidance. We find that firms headquartered in areas with a higher terrorism risk engage in more corporate tax avoidance. Further, we show that terrorism risk has a greater impact on corporate tax avoidance when terrorist attacks are severe in terms of the targets hit, damage, and the numbers of victims. Tests on channels show that higher terrorism risk is associated with firms suffering greater financial constraints. We provide evidence that increased terrorism risk is also associated with the reallocation of US Internal Revenue Service budgeted expenditures away from tax return audit enforcement and towards increased funding for the Internal Revenue Service Criminal Investigative Division combating terrorism. We conclude that terrorism risk increases and facilitates the corporate demand for tax savings. [ABSTRACT FROM AUTHOR]