We study whether increases in the cost of tax avoidance affect corporate investment.

Tax avoidance can raise investment not only by lowering effective tax rates, but also by

preserving internal funds that firms can use when external finance is costly. Identifying

this channel is difficult because tax reforms typically change both statutory tax rates

and incentives to avoid taxes. We exploit offshore data leaks as firm-specific shocks to

the cost of avoidance that do not change statutory tax rates. We link the ICIJ Offshore

Leaks Database to Orbis Europe and identify exposed private firms across 12 European

countries. Using a staggered difference-in-differences design, we find that exposed firms

reduce investment after the leaks. The decline is concentrated among firms for which

internal funds are likely to have high shadow value: smaller firms, younger firms, firms

without prior long-term debt relationships, and lower-productivity firms. Exposed

firms also experience deteriorating operating cash flows and pre-tax profits. We find no

evidence that the effects are driven by product-market penalties or credit supply shocks.

The evidence shows that increases in avoidance costs can reduce real investment by

tightening firms’ internal financing capacity, even when statutory tax rates and credit

conditions do not change.