Climate change, tax avoidance, and shareholder value: Evidence from the Paris Agreement 

By | October 31, 2023

Climate change is undeniably one of the most pressing challenges of our era. The scientific consensus regarding the urgency of addressing climate change has spurred international efforts to combat its effects. Central to this endeavor is the Paris Agreement, a historic international climate accord signed by 196 countries in 2015. This agreement aims to mitigate climate change by limiting global warming to below 2 degrees Celsius above pre-industrial levels. Consequently, climate change’s financial and economic implications have become an imperative field of research. This article contributes to this crucial area of study by examining the impact of corporate tax avoidance on shareholder value concerning the adoption of the Paris Agreement. 

Taxation is the primary means governments generate fiscal revenue, supporting essential public services and infrastructure development. However, it also represents a substantial expense for individual companies. Some businesses employ tax avoidance strategies to retain internal cash reserves that would otherwise be directed to governmental coffers. Tax avoidance can encompass legitimate tax planning and illicit tax evasion actions by firms. These strategic maneuvers may involve exploiting legal loopholes or engaging in complex financial structures to reduce tax liabilities. 

This study posits two competing hypotheses regarding the effect of corporate tax avoidance on shareholder value in the context of the Paris Agreement. First, we propose that companies engaging in higher levels of tax avoidance can allocate increased resources to address climate-related concerns aligned with the Paris Agreement. By taking more impactful measures to combat climate change, these firms may reduce their vulnerability to environmental risks, resulting in heightened shareholder value. This perspective suggests that stronger tax avoidance practices may lead to more positive market reactions to adopting the Paris Agreement. 

Conversely, the motivation behind tax avoidance may stem from agency conflicts. These conflicts may hinder a firm’s willingness to enact climate-oriented initiatives that yield long-term benefits for shareholders. In this view, elevated tax avoidance could lead to more adverse stock market reactions to the Paris Agreement’s adoption. This hypothesis suggests that strong tax avoidance may be seen as detrimental to shareholder interests in the context of climate change. 

Our research findings provide valuable insights into the effect of corporate tax avoidance on shareholder value in the wake of the Paris Agreement’s adoption. We find that firms with higher levels of tax avoidance experienced significantly more positive stock market reactions to the agreement’s adoption. This evidence suggests that funds that might otherwise have been allocated to taxes are being directed toward addressing climate challenges in accordance with the Paris Agreement. Consequently, these firms appear to deliver improved shareholder value. 

To ensure the robustness of our results, we conduct additional analyses, including propensity score matching, instrumental-variable analysis, Lewbel’s heteroscedastic identification, and the use of alternative measures of tax avoidance. These supplementary analyses consistently corroborate our initial findings, underscoring the robustness of the relationship between tax avoidance and shareholder value in the context of climate change. 

Furthermore, our research unveils an interesting nuance in the impact of tax avoidance on shareholder wealth. We find that the positive effect of tax avoidance on shareholder value is notably less pronounced for companies that distribute larger dividends. This observation can be attributed to the fact that allocating resources for dividend payments diminishes a firm’s capacity to address climate-related challenges effectively. In essence, dividends act as a competing allocation of resources that may limit a company’s ability to invest in climate-oriented initiatives. 

Our study contributes to existing knowledge in several significant ways. First, we enrich the tax avoidance literature by highlighting a nuanced perspective. While prior studies have suggested that tax avoidance may be motivated by agency conflicts, we demonstrate that, when considering climate change, investors view tax avoidance as beneficial. This is because the money saved from paying less tax can be redirected toward addressing climate issues more efficiently, ultimately enhancing shareholder value. 

Second, our research adds to the growing body of literature that examines how the stock market responds to climate-related events. Our study is noteworthy as it is the first to reveal that tax avoidance plays a substantial role in shaping shareholder value within the context of climate change. This underscores the importance of considering tax strategies as a significant factor in assessing a firm’s response to climate-related challenges. 

Finally, our research contributes to the literature on dividend policy. We demonstrate that dividends can significantly diminish the favorable effect of tax avoidance on shareholder value, particularly in the context of climate change. This finding highlights the trade-off that firms must navigate between returning profits to shareholders and investing in sustainability initiatives that may ultimately safeguard long-term shareholder value. 

In conclusion, climate change presents a formidable challenge that demands a multifaceted response from governments, businesses, and society. It is crucial to understand the financial and economic consequences of efforts to mitigate climate change. This study has explored the impact of corporate tax avoidance on shareholder value in the context of the adoption of the Paris Agreement, shedding light on the complex interplay between tax strategies and climate-related initiatives. 

In summary, this research contributes to our understanding of the intricate relationship between corporate tax avoidance, shareholder value, and climate change. By illuminating the implications of tax strategies in the context of global environmental challenges, our study offers valuable insights for policymakers, investors, and businesses seeking to navigate the complex landscape of climate change mitigation and financial decision-making. As the world grapples with the urgency of climate action, such insights become increasingly vital for informed decision-making and sustainable progress. 


Sang Mook Lee is an Associate Professor of Finance at Pennsylvania State University, Great Valley.  

Pattanaporn Chatjuthamard is a Faculty Member at the Sasin School of Management.  

Pandej Chintrakarn is an Associate Professor of Economics at the Mahidol University International College (MUIC), Mahidol University, Thailand.  

Pornsit Jiraporn is is a Professor of Finance at Pennsylvania State University, Great Valley. 

This post was adapted from their paper, “Climate Change, Tax Avoidance, and Shareholder Value: Evidence from the Paris Agreement,” available on SSRN.  

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