Obscured by Clouds: The Impact of Weather-induced Managerial Mood on Corporate Tax Avoidance
57 Pages Posted: 10 Nov 2017 Last revised: 9 Jun 2019
Date Written: June 7, 2019
Using variation in local sunshine as a mood-priming construct, we examine the impact of managerial mood on corporate tax avoidance. For a large sample of U.S. publicly listed firms, we report strong, robust evidence that negative managerial mood induced by cloudy weather leads firms to undertake more aggressive tax positions. Reinforcing the intuition underlying our main result, we find that negative weather-induced mood is positively associated with managers’ subjective perceptions of firms’ financial constraints, but not with their actual financial constraints. In cross-sectional analysis, consistent with expectations, we find that the importance of weather-induced mood to tax avoidance subsides when the board has more directors with financial expertise and the threat that the firm will experience an Internal Revenue Service (IRS) audit is greater. We also find that firms are more apt to purchase tax services from their auditor when local weather is cloudy. Collectively, our evidence implies that corporate tax avoidance rises when managerial mood is negative, although external monitoring by directors with financial expertise and the IRS constrains this behavior.
Keywords: Weather; Managerial mood; Tax avoidance
JEL Classification: G02, G30, M40, M41
Suggested Citation: Suggested Citation