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Tax avoidance, cost of debt and shareholder activism: Evidence from Korea

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  • Lim, Youngdeok
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    Abstract

    This paper examines the impact of tax avoidance on the cost of debt and its interaction effect with shareholder activism. Using Korean firms, I find a negative relationship between tax avoidance and the cost of debt, supporting the trade-off theory. Further tests reveal that the negative relationship becomes stronger when the level of institutional ownership is high. It becomes even stronger after 1998, when the shareholder rights of institutional investors were strengthened. It suggests that the managerial opportunism theory has an additional explanation for tax avoidance activities. My findings indicate that tax avoidance reduces the cost of debt through trade-offs and creates a managerial rent diversion, which is mitigated in firms with larger institutional holdings.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 2 (February)
    Pages: 456-470

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:2:p:456-470

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Tax avoidance Cost of debt Trade-off Managerial opportunism Shareholder activism;

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    Cited by:
    1. 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," Research Discussion Papers 3/2014, Bank of Finland.

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