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.