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

See all articles by Yangyang Chen

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Rui Ge

Shenzhen University - Shenzhen Audencia Business School

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area

Leon Zolotoy

University of Melbourne - Melbourne Business School

Date Written: June 7, 2019

Abstract

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

Chen, Yangyang and Ge, Rui and Pittman, Jeffrey A. and Veeraraghavan, Madhu and Zolotoy, Leon, Obscured by Clouds: The Impact of Weather-induced Managerial Mood on Corporate Tax Avoidance (June 7, 2019). Available at SSRN: https://ssrn.com/abstract=3067343 or http://dx.doi.org/10.2139/ssrn.3067343

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Rui Ge

Shenzhen University - Shenzhen Audencia Business School ( email )

Shenzhen
China

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area ( email )

Bangalore
Manipal, Karnataka 576104
India
+91-820-2701030 (Phone)

Leon Zolotoy

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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