Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans

We find that firms with greater tax avoidance incur higher spreads when obtaining bank loans. This finding is robust in a battery of sensitivity analyses and in two quasi-experimental settings including the implementation of Financial Accounting Standards Board Interpretation No. 48 and the revelati...

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Bibliographic Details
Published in:Journal of financial economics 2014-07, Vol.113 (1), p.109-130
Main Authors: Hasan, Iftekhar, Hoi, Chun Keung (Stan), Wu, Qiang, Zhang, Hao
Format: Article
Language:English
Subjects:
Agency risk
Bank loans
Corporate taxes
Cost of bank loans
Debt financing
FASB Interpretations
FIN 48
Information risk
Loans
Spread
Studies
Tax avoidance
Tax shelters
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Summary:We find that firms with greater tax avoidance incur higher spreads when obtaining bank loans. This finding is robust in a battery of sensitivity analyses and in two quasi-experimental settings including the implementation of Financial Accounting Standards Board Interpretation No. 48 and the revelation of past tax sheltering activity. Firms with greater tax avoidance also incur more stringent nonprice loan terms, incur higher at-issue bond spreads, and prefer bank loans over public bonds when obtaining debt financing. Overall, these findings indicate that banks perceive tax avoidance as engendering significant risks.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2014.03.004