Do Creditors Influence Corporate Tax Planning? Evidence from Loan Covenants

47 Pages Posted: 19 Jan 2017 Last revised: 8 Feb 2019

See all articles by Kirsten A. Cook

Kirsten A. Cook

Texas Tech University - Area of Accounting

Tao Ma

Rawls College of Business, Texas Tech University

Yijia (Eddie) Zhao

University of Massachusetts Boston - College of Management

Date Written: February 6, 2019

Abstract

This study examines how creditor interventions after debt covenant violations affect corporate tax avoidance. Using a regression discontinuity design, we find that creditor interventions increase borrowers’ tax avoidance. This effect is concentrated among firms with weaker shareholder governance before creditor interventions and among those with less bargaining power during subsequent debt renegotiations. Our results indicate that creditors play an active role in shaping corporate tax policy outside of bankruptcy.

Keywords: covenant violation, tax avoidance

JEL Classification: G21, G30

Suggested Citation

Cook, Kirsten A. and Ma, Tao and Zhao, Yijia, Do Creditors Influence Corporate Tax Planning? Evidence from Loan Covenants (February 6, 2019). Available at SSRN: https://ssrn.com/abstract=2900471 or http://dx.doi.org/10.2139/ssrn.2900471

Kirsten A. Cook

Texas Tech University - Area of Accounting ( email )

P.O. Box 42101
Lubbock, TX 79409
United States

Tao Ma

Rawls College of Business, Texas Tech University ( email )

Box 42101
Lubbock, TX 79409-2101
United States

Yijia Zhao (Contact Author)

University of Massachusetts Boston - College of Management ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States

HOME PAGE: http://sites.google.com/view/eddie-zhao/home

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