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

Iftekhar Hasan, Chun Keung (Stan) Hoi, Qiang Wu, Hao Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

161 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)109-130
Number of pages22
JournalJournal of Financial Economics
Volume113
Issue number1
DOIs
Publication statusPublished - Jul 2014
Externally publishedYes

Keywords

  • Agency risk
  • Cost of bank loans
  • FIN 48
  • Information risk
  • Tax avoidance

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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