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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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Author Info

  • Hasan, Iftekhar

    ()
    (Fordham University and Bank of Finland)

  • Hoi, Chun-Keung (Stan)

    (E. Philip Saunders College of Business, Rochester Institute of Technology)

  • Wu, Qiang

    (Lally School of Management, Rensselaer Polytechnic Institute)

  • Zhang, Hao

    (E. Philip Saunders College of Business, Rochester Institute of Technology)

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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 non-price 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.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1403.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 3/2014.

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Length: 67 pages
Date of creation: 15 Jan 2014
Date of revision:
Handle: RePEc:hhs:bofrdp:2014_003

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: tax avoidance; cost of bank loans; information risk; agency risk; audit risk; FIN 48;

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