Beauty is in the Eye of the Beholder: The Effect of Corporate Tax Avoidance on the Cost of Bank Loans

67 Pages Posted: 6 Nov 2013 Last revised: 12 Nov 2013

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Chun Keung (Stan) Hoi

Rochester Institute of Technology (RIT) - Department of Accounting and Finance

Qiang Wu

Hong Kong Polytechnic University-School of Accounting and Finance

Hao Zhang

Rochester Institute of Technology (RIT) - Saunders College of Business

Date Written: November 4, 2013

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.

Keywords: Tax avoidance, Tax aggressiveness, FIN 48, Cost of bank loans, Cost of public bonds, Risk

JEL Classification: G21; H26; M40

Suggested Citation

Hasan, Iftekhar and Hoi, Chun Keung (Stan) and Wu, Qiang and Zhang, Hao, Beauty is in the Eye of the Beholder: The Effect of Corporate Tax Avoidance on the Cost of Bank Loans (November 4, 2013). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2349782

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Chun Keung (Stan) Hoi

Rochester Institute of Technology (RIT) - Department of Accounting and Finance ( email )

Saunders College of Business
105 Lomb Memorial Drive
Rochester, NY 14623-5608
United States
585-475-2718 (Phone)
585-475-6920 (Fax)

Qiang Wu (Contact Author)

Hong Kong Polytechnic University-School of Accounting and Finance ( email )

5182095596 (Phone)
12047-4974 (Fax)

Hao Zhang

Rochester Institute of Technology (RIT) - Saunders College of Business ( email )

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

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