Investor sentiment and corporate tax avoidance

Investor sentiment affects investors' value judgment, risk preference, and decision-making process. Based on the perspective of marginal cost-benefit analysis, we investigate whether and how investor sentiment, as a type of behavior bias, affects corporate tax avoidance. The results indicate that increases in investor sentiment are associated with increases in corporate tax aggressiveness. In addition, the association is more pronounced for firms which have more retail investors, which are private enterprises, and which are located in areas with weaker tax enforcement. Further evidence shows that increased tax avoidance induced by increases in investor sentiment significantly enhances firms' short-term stock return, but impairs firms' long-term value. Our focus on the impact of investor sentiment on corporate tax aggressiveness enriches the research on the determinants of corporate tax avoidance and deepens the understanding of the cost-benefit trade-off of tax aggressiveness. This paper also has practical implications for regulatory authorities and investor protection.