The Impact of Managerial Mood on Public Firms’ Decisions: Evidence from Corporate Tax Avoidance
56 Pages Posted: 10 Nov 2017 Last revised: 13 Dec 2019
Date Written: December 13, 2019
We examine the impact of managerial mood on corporate tax avoidance—a ubiquitous corporate decision. Using variation in local sunshine as exogenous shocks to managerial mood, we report strong, robust evidence that negative 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 the cross-sectional analysis, we find that the importance of weather-induced mood to tax avoidance subsides when the board has more financial expertise and the tax audit threat is greater—i.e., in situations when managers are held more accountable for their tax planning decisions. Taken together, our findings cast weather-induced managerial mood as a salient contextual factor shaping corporate tax avoidance decisions.
Keywords: Weather; Managerial Mood; Tax Avoidance
JEL Classification: G02; G30
Suggested Citation: Suggested Citation