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

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

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.

Suggested Citation

  • Hasan, Iftekhar & Hoi, Chun Keung (Stan) & Wu, Qiang & Zhang, Hao, 2014. "Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans," Journal of Financial Economics, Elsevier, vol. 113(1), pages 109-130.
    • Handle: RePEc:eee:jfinec:v:113:y:2014:i:1:p:109-130
    DOI: 10.1016/j.jfineco.2014.03.004
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    More about this item

    Keywords

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

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