Corporate Tax Avoidance and Bank Loan Contracting
Jeong-Bon Kim V
City University of Hong Kong
Oliver Zhen Li
National University of Singapore
CUNY Baruch College
August 29, 2010
We examine the impact of corporate tax avoidance on the price and non-price terms of bank loans. We predict and provide evidence that banks charge lower loan spreads and impose fewer covenant restrictions when firms exhibit greater tax avoidance. These favorable effects are more pronounced for borrowers with higher credit risk and better governance. Firms with more effective tax avoidance are also less likely to violate covenant restrictions. Our results suggest that banks perceive tax avoidance as a credit quality improving factor and are willing to offer favorable loan contracting terms to successful tax-avoiding borrowers.
Number of Pages in PDF File: 57
Keywords: Tax avoidance; loan contracting; credit risk
JEL Classification: G21; G32; H26working papers series
Date posted: April 28, 2010 ; Last revised: November 21, 2010
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