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U.S. Worldwide Taxation and Bank Loan Contracting

64 Pages Posted: 4 Apr 2017 Last revised: 15 Sep 2017

Zhiming Ma

Peking University

Derrald Stice

Hong Kong University of Science & Technology - Department of Accounting

Danye Wang

New York University (NYU)

Date Written: September 13, 2017

Abstract

This study examines the effect of earnings repatriation taxes on bank loan contracting. We find that banks charge U.S. multinationals a higher loan spread when their tax cost of foreign earnings repatriation is high. This effect is more pronounced for firms with recent poor accounting performance and for those that are financially constrained. Our results are robust to a difference-in-differences research design using The American Jobs Creation Act of 2004 as an exogenous shock. The results also suggest that repatriation costs are associated with an increase in the likelihood of lenders requiring collateral and including more financial covenants in loan contracts. We also find that high repatriation costs increase the likelihood that a firm will borrow from foreign banks. The effect of earnings repatriation taxes is different from an overall tax avoidance effect, and our evidence is consistent with the effect operating mainly through agency and information risk channels. Overall, this study contributes to our understanding of the effect of the US tax system on bank loan contracting for U.S. multinational firms.

Keywords: Earnings Repatriation, Debt Contracting, Taxes, U.S. Worldwide Taxation

JEL Classification: G01, M4, H2, H25, K3, K34

Suggested Citation

Ma, Zhiming and Stice, Derrald and Wang, Danye, U.S. Worldwide Taxation and Bank Loan Contracting (September 13, 2017). Available at SSRN: https://ssrn.com/abstract=2945324 or http://dx.doi.org/10.2139/ssrn.2945324

Zhiming Ma

Peking University ( email )

Department of Accounting
Guanghua School of Management
Beijing, 100871
China

Derrald Stice (Contact Author)

Hong Kong University of Science & Technology - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

Danye Wang

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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