Corporate Tax Avoidance and Bank Loan Contracting

57 Pages Posted: 28 Apr 2010 Last revised: 21 Nov 2010

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Oliver Zhen Li

National University of Singapore (NUS)

Yinghua Li

Arizona State University (ASU) - School of Accountancy

Date Written: August 29, 2010

Abstract

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.

Keywords: Tax avoidance; loan contracting; credit risk

JEL Classification: G21; G32; H26

Suggested Citation

Kim, Jeong-Bon and Li, Oliver Zhen and Li, Yinghua, Corporate Tax Avoidance and Bank Loan Contracting (August 29, 2010). Available at SSRN: https://ssrn.com/abstract=1596209 or http://dx.doi.org/10.2139/ssrn.1596209

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Oliver Zhen Li

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Yinghua Li (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States
480-965-5188 (Phone)

HOME PAGE: http://wpcarey.asu.edu/people/profile/2386522

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