Diversity of uncertainty and corporate tax avoidance

<p><span>We explore the impact of the diversity of economic policy uncertainty (EPU) on corporate tax avoidance. While previous research has extensively explored the effects of EPU levels, the role of EPU diversity remains underexamined. EPU diversity refers to the simultaneous occurrence of multiple sources of uncertainty, such as regulatory changes, trade policy fluctuations, and monetary policy shifts. We introduce two competing hypotheses: the risk exacerbation hypothesis, which suggests that higher EPU diversity increases corporate risk and leads to greater tax avoidance, and the risk diversification hypothesis, which posits that diverse uncertainties can mitigate overall risk and reduce tax avoidance. Our results support the risk exacerbation hypothesis. We find that firms facing greater EPU diversity engage in significantly higher tax avoidance. This effect persists even when controlling for the overall level of EPU, indicating that EPU diversity is an independent and critical dimension of uncertainty. Our findings have important implications for policymakers, corporate executives, and investors, highlighting the need for nuanced economic policies and strategic financial planning.</span></p>