The Role of Creditor Protection in Lending and Tax Avoidance

Journal of Financial and Quantitative Analysis, forthcoming

72 Pages Posted: 14 Jan 2021 Last revised: 15 Mar 2022

See all articles by Antonio De Vito

Antonio De Vito

Alma Mater Studiorum University of Bologna; IE Business School - IE University

Martin Jacob

WHU - Otto Beisheim School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 27, 2021

Abstract

We examine how creditor rights affect the trade-off between non-debt and debt tax shields. Using four bankruptcy reforms and a panel of private and public firms from Italy, we show that laws empowering creditors reduce tax avoidance and increase debt financing, consistent with firms substituting non-debt tax shields with debt tax shields. We corroborate the validity of our findings using a panel of public firms across 33 countries. Additionally, we document that the impact of creditor protection laws is mitigated by tax system characteristics, which significantly reduce the incentives to substitute tax avoidance with debt.

Keywords: government policy and regulation, bankruptcy, debt, capital structure, tax avoidance

JEL Classification: G28; G32; G33; H26; K34; M41

Suggested Citation

De Vito, Antonio and Jacob, Martin, The Role of Creditor Protection in Lending and Tax Avoidance (November 27, 2021). Journal of Financial and Quantitative Analysis, forthcoming, Available at SSRN: https://ssrn.com/abstract=3727201 or http://dx.doi.org/10.2139/ssrn.3727201

Antonio De Vito

Alma Mater Studiorum University of Bologna ( email )

Bologna
Italy

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

Martin Jacob (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

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