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Does the use of tax haven subsidiaries by U.S. multinational corporations affect the cost of bank loans?

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  • Richardson, Grant
  • Taylor, Grantley
  • Obaydin, Ivan

Abstract

This study examines whether the use of tax haven subsidiaries by U.S. multinational corporations (MNCs) is associated with the cost of bank loans. We find that more intensive tax haven subsidiary use by MNCs is positively associated with the cost of bank loans. In cross-sectional analyses, we identify channels through which the positive association between tax haven intensity and bank loan costs is more pronounced, such as a weak information environment, poor corporate governance, high CEO pay-for-performance and corporation-related wealth, and low managerial ability. We also find that intensive tax haven use is positively (negatively) associated with non-price loan contract terms, such as collateralization and financial covenants (loan maturity and general covenants). Our main result holds when public bonds are substituted for bank loans. Finally, additional analysis shows that MNCs with high levels of tax haven intensity are more likely to rely on bank loan financing than on raising debt from the bond market. Overall, this study adds to an emerging body of literature on corporate taxation and debt policy.

Suggested Citation

  • Richardson, Grant & Taylor, Grantley & Obaydin, Ivan, 2020. "Does the use of tax haven subsidiaries by U.S. multinational corporations affect the cost of bank loans?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:corfin:v:64:y:2020:i:c:s0929119920301073
    DOI: 10.1016/j.jcorpfin.2020.101663
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    More about this item

    Keywords

    Tax haven subsidiaries; U.S. multinational corporations; Cost of bank loans;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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