Beauty is in the Eye of the Beholder: The Effect of Corporate Tax Avoidance on the Cost of Bank Loans

67 Pages Posted: 6 Nov 2013 Last revised: 12 Nov 2013

Iftekhar Hasan

Gabelli School of Business, Fordham University; Bank of Finland

Chun Keung (Stan) Hoi

Rochester Institute of Technology - Saunders College of Business

Qiang Wu

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Hao Zhang

Rochester Institute of Technology (RIT) - Saunders College of Business

Date Written: November 4, 2013

Abstract

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.

Keywords: Tax avoidance, Tax aggressiveness, FIN 48, Cost of bank loans, Cost of public bonds, Risk

JEL Classification: G21; H26; M40

Suggested Citation

Hasan, Iftekhar and Hoi, Chun Keung (Stan) and Wu, Qiang and Zhang, Hao, Beauty is in the Eye of the Beholder: The Effect of Corporate Tax Avoidance on the Cost of Bank Loans (November 4, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2349782

Iftekhar Hasan

Gabelli School of Business, Fordham University ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Chun Keung (Stan) Hoi

Rochester Institute of Technology - Saunders College of Business ( email )

105 Lomb Memorial Drive
Rochester, NY 14623
United States
585-475-2718 (Phone)

Qiang Wu (Contact Author)

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

110 8th St
Troy, NY 12180
United States
518-276-3338 (Phone)
518-276-8661 (Fax)

Hao Zhang

Rochester Institute of Technology (RIT) - Saunders College of Business ( email )

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

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