Does Credit Rating Conservatism Matter for Corporate Tax Avoidance

Posted: 11 May 2017 Last revised: 8 May 2019

See all articles by Tao Chen

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance

Sidney Leung

City University of Hong Kong (CityUHK) - Department of Accountancy

Lingmin Xie

Shenzhen University

Date Written: May 1, 2017

Abstract

Using the passage of Dodd-Frank as a quasi-natural experiment, we examine the effect of credit rating conservatism on corporate tax avoidance. We find that treatment firms engage in more tax-planning activities following Dodd-Frank than control firms. The results are robust to an alternative identification strategy based on U.S. sovereign downgrade. We further find that these effects are mainly driven by firms experiencing an increase in rating conservatism, firms with large existing tax-planning capacity, firms with decreased use of external financing, and firms with weak external monitoring. Overall, the findings provide evidence that credit rating conservatism plays an important role in corporate tax-avoidance decisions.

Keywords: Credit rating conservatism, credit rating agency, corporate tax avoidance, Dodd-Frank Wall Street Reform and Consumer Protection Act, U.S. sovereign downgrade

JEL Classification: G24 H26

Suggested Citation

Chen, Tao and Leung, Sidney and Xie, Lingmin, Does Credit Rating Conservatism Matter for Corporate Tax Avoidance (May 1, 2017). Available at SSRN: https://ssrn.com/abstract=2966014 or http://dx.doi.org/10.2139/ssrn.2966014

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1A-08, Nanyang Avenue
Singapore, 639798
Singapore

Sidney Leung

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788-7924 (Phone)
+852 2788-7944 (Fax)

Lingmin Xie (Contact Author)

Shenzhen University ( email )

3688 Nanhai Road, Nanshan District
Shenzhen, Guangdong 518060
China

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