Beauty is in the Eye of the Beholder: The Effect of Corporate Tax Avoidance on the Cost of Bank Loans
Gabelli School of Business, Fordham University; Bank of Finland
Chun Keung (Stan) Hoi
Rochester Institute of Technology - Saunders College of Business
Rensselaer Polytechnic Institute (RPI) - Lally School of Management
Rochester Institute of Technology (RIT) - Saunders College of Business
November 4, 2013
Journal of Financial Economics (JFE), Forthcoming
We find that firms with greater tax avoidance incur higher spreads when obtaining bank loans. This finding is robust in a battery of sensitivity analyses and in two quasi experimental settings including the implementation of Financial Accounting Standards Board Interpretation No. 48 and the revelation of past tax sheltering activity. Firms with greater tax avoidance also incur more stringent non-price loan terms, incur higher at-issue bond spreads, and prefer bank loans over public bonds when obtaining debt financing. Overall, these findings indicate that banks perceive tax avoidance as engendering significant risks.
Number of Pages in PDF File: 67
Keywords: Tax avoidance, Tax aggressiveness, FIN 48, Cost of bank loans, Cost of public bonds, Risk
JEL Classification: G21; H26; M40
Date posted: November 6, 2013 ; Last revised: November 12, 2013
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