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This paper examines the effect of market-level managerial sentiment on corporate tax avoidance. We hypothesize that managerial sentiment affects managers’ subjective assessments of future cash flows, and consequently their decisions on tax avoidance. Our empirical analyses reveal a significant and negative relationship between managerial sentiment and corporate tax avoidance, and this relationship is more pronounced in firms with fewer financial constraints, firms with a lower level of institutional investors and firms with managers that are overconfident. Our results are robust to controls for managerial overconfidence and investor sentiment, different measures for tax avoidance and tax aggressiveness, examination of specific tax programs and an instrumental variable 2SLS regression using the weather condition as an instrument. Our study contributes to the tax avoidance literature by identifying a new, time-variant macroeconomic determinant of tax avoidance that is based on a psychological bias.