Does credit rating conservatism matter for corporate tax avoidance?

Using the passage of Dodd-Frank and the US sovereign downgrade as quasi-natural experiments, we examine the effect of credit rating conservatism on corporate tax avoidance. We find that treatment firms engage in more tax-planning activities than control firms in both research settings. We further find that these effects are driven mainly by firms with large existing tax-planning capacity, firms with decreased use of external financing, firm with more reliance on rating information, and firms with weak external monitoring using the large Dodd-Frank sample. Overall, the findings provide evidence that credit rating conservatism plays a role in corporate tax-avoidance decisions.