More and Safer Corporate Tax Planning: On the Benefits of Bank Control
50 Pages Posted: 18 Apr 2016 Last revised: 7 Jan 2021
Date Written: August 31, 2020
Using a regression discontinuity design, this study shows that strengthened bank control rights triggered by loan covenant violations lead to an increase in cash tax savings and a reduction in tax risk. This effect is driven largely by firms with more severe shareholder–debtholder conflicts. Investigating the mechanisms involved, we find that firms appoint more tax-savvy directors on the board after covenant violations. Moreover, firms increase state tax planning activities, reduce offshore tax haven operations, and decrease outbound income shifting. Overall, our findings suggest that bank control rights can mitigate shareholder–debtholder conflict and improve tax planning efficiency.
Keywords: creditor control right, tax planning, tax risk, covenant violation, shareholder–debtholder conflict, contract incompleteness
JEL Classification: G21, G32, G34, H25, H26
Suggested Citation: Suggested Citation