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Customers’ Relationship-Specific Investments and Corporate Tax Avoidance

We investigate whether corporate tax avoidance is affected by a firm’s relationship with its customers. We find a positive association between a firm’s tax avoidance and its customers’ relationship-specific investments, demonstrating that customers value the cash flow benefits generated by a firm’s tax savings. The absence of such a link in firms with weak corporate governance is consistent with the agency perspective of tax avoidance. Further analyses show that such an association is more pronounced when a firm has less bargaining power and when certain complementary mechanism is in place. We conclude that customer relationship is an important factor that determines a firm’s tax avoidance incentives.