Corporate Governance, Tax Avoidance, and Financial Constraints
Financial Management, Fall 2018, 47(3), 651-677
42 Pages Posted: 28 Dec 2017 Last revised: 16 Jun 2019
Date Written: December 20, 2017
We examine how corporate governance affects the relationship between corporate tax avoidance and financial constraints. Conditional on having poor governance, tax avoidance is associated with greater financial constraints and a greater likelihood of financial distress. In firms with strong governance, however, we find that tax avoidance does not have a negative impact on financial constraints. Our results suggest that tax avoidance is a less useful source of financing for constrained firms when they are plagued with potential agency problems and opaque information environments. Stronger governance mechanisms can help firms mitigate the negative consequences of tax avoidance.
Keywords: Tax Avoidance, Financial Constraints, Corporate Governance, Agency Problems
JEL Classification: G30, G33, H25, H26
Suggested Citation: Suggested Citation