67 Pages Posted: 6 Nov 2013 Last revised: 12 Nov 2013
Date Written: November 4, 2013
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: 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