Do Creditors Influence Corporate Tax Planning? Evidence from Loan Covenants

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: 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