64 Pages Posted: 4 Apr 2017 Last revised: 15 Sep 2017
Date Written: September 13, 2017
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: 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