Climate Risk and Tax Avoidance of Climate‐Sensitive Firms

ABSTRACT This paper studies corporate tax behavior under increasing risks related to climate change. Using observations for China's listed firms in climate‐sensitive sectors from 2000 to 2020, our results highlight that tax avoidance has been employed to hedge climate change risks for climate‐sensitive firms, whereas we do not find climate risk‐induced avoidance behavior for nonclimate‐sensitive firms. Increasing operating costs and financial distress associated with climate change risks motivates firms to reserve cash flow from tax payments. In the climate‐sensitive sectors, firms with myopic, risk‐averse, stronger financial background executives are more likely to adopt opportunistic tax strategies to deal with climate change risks. This paper deepens our understanding of how managerial characteristics shape corporate tax strategy and behaviors for climate risk management.