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Effect of corporate tax avoidance activities on firm bankruptcy risk

Author

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  • Dhawan, Anirudh
  • Ma, Liangbo
  • Kim, Maria H.

Abstract

Corporate tax avoidance has been shown to raise the cost of bank debt and lower credit and bond ratings. However, it is unclear whether tax avoidance actually increases a firm’s bankruptcy risk or whether it is just viewed negatively by banks and rating agencies. We find that firms engaging in tax avoidance and firms that are thinly capitalized face higher bankruptcy risk. To account for endogeneity and functional form misspecification, we verify our results using instrumental variable and propensity score matching methods. Our findings are consistent with the view that tax avoidance is a risk-enhancing activity.

Suggested Citation

  • Dhawan, Anirudh & Ma, Liangbo & Kim, Maria H., 2020. "Effect of corporate tax avoidance activities on firm bankruptcy risk," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(2).
    • Handle: RePEc:eee:jocaae:v:16:y:2020:i:2:s1815566920300059
    DOI: 10.1016/j.jcae.2020.100187
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    References listed on IDEAS

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    More about this item

    Keywords

    Tax avoidance; Bankruptcy risk; Thin capitalization; Tax risk;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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