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

Hasan, I., Hoi, C. K. S., Wu, Q. & Zhang, H., Jul-2014, In : Journal of Financial Economics. 113, 1, p. 109-130 22 p.

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  • Beauty is in the eye of the beholder: The effect of corporate tax

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DOI

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. (C) 2014 Elsevier B.V. All rights reserved.

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

    Keywords

  • Tax avoidance, Cost of bank loans, Information risk, Agency risk, FIN 48, OPTIMAL CAPITAL STRUCTURE, EARNINGS MANAGEMENT, DEBT, AGGRESSIVENESS, INCENTIVES, FIRMS, EQUILIBRIUM, DISCLOSURE, COVENANTS, RISK

ID: 66168538