Debtor-Creditor Relationship and Corporate Tax Planning: Evidence from Initiation of Credit Default Swaps Trading

61 Pages Posted: 21 Jul 2016 Last revised: 10 May 2019

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Bing Li

City University of Hong Kong (CityUHK)

Zhenbin Liu

Hong Kong Baptist University

Liandong Zhang

Singapore Management University - School of Accountancy

Date Written: May 8, 2019

Abstract

This study investigates the effect of the debtor–creditor relationship on firms’ tax planning decisions. We explore the initiation of credit default swaps (CDS) as a shock to the debtor–creditor relationship that attenuates the concavity of creditors’ payoff function and reduces their incentives to closely monitor debtors and to protect their claims. As a result, debtors engage in more tax avoidance. Less price protection by creditors also reduces debtors’ marginal cost of tax avoidance and thus increases debtors’ level of tax avoidance. Using a differences-in-differences regression, we find that borrowing firms significantly increase their level of tax avoidance when there are CDS trading on their debts. This effect is more pronounced when the debtor–creditor relationship is characterized by continuous monitoring prior to CDS trade initiation, when creditors suffer lower reputation losses if they reduce monitoring post-CDS, and when the CDS market is more liquid.

Keywords: Credit Default Swaps, Tax Planning, Debt Renegotiation

JEL Classification: H25, H26, G14

Suggested Citation

Kim, Jeong-Bon and Li, Bing and Liu, Zhenbin and Zhang, Liandong, Debtor-Creditor Relationship and Corporate Tax Planning: Evidence from Initiation of Credit Default Swaps Trading (May 8, 2019). Available at SSRN: https://ssrn.com/abstract=2812447 or http://dx.doi.org/10.2139/ssrn.2812447

Jeong-Bon Kim

City University of Hong Kong ( email )

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

Bing Li (Contact Author)

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Department of Accountancy, AC3
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/bingli/

Zhenbin Liu

Hong Kong Baptist University ( email )

Kowloon Tong, Kowloon
Hong Kong

HOME PAGE: http://aclw.hkbu.edu.hk/eng/faculty/admin-details.jsp?id=zbliuHKB&cv=00069&cid=306&cp=1

Liandong Zhang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://accountancy.smu.edu.sg/faculty/profile/150531/Liandong-ZHANG

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