Credit refinancing and corporate tax avoidance |
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| Institution: | 1. Department of Economics and Management, University of Padova, Italy;2. WHU – Otto Beisheim School of Management, Germany;1. University of Michigan-Flint, Flint, MI, United States;2. Miami University, Oxford, OH, United States;3. University of Memphis, Memphis, TN, United states;4. Old Dominion Unversity, Norfolk, VA, United States;1. Department of Business Administration, University of Patras, University Campus, 26504 Rio - Patras, Greece;2. Department of Mathematics, University of Patras, University Campus, 26504 Rio – Patras, Greece;1. School of Economics and Management, Tsinghua University, Beijing 100084, China;2. Guanghua School of Management, Peking University, Beijing 100085, China;3. School of Accountancy, Singapore Management University, Singapore 188065, Singapore;4. College of Economics and Management, China Agricultural University, Beijing 100083, China;1. UNSW Sydney, School of Accounting, Sydney, NSW 2052, Australia;2. University of Western Australia, Accounting and Finance, Perth, WA 6009, Australia;1. Center for Gender, Leadership, and Inclusion, Cranfield University School of Management, United Kingdom;2. Department of Business Administration, University of Cyprus, Cyprus;3. Department of Accounting and Finance, University of Cyprus, Cyprus;1. Monash University, Australia;2. The University of Hong Kong, Faculty of Business and Economics, Hong Kong;3. Nottingham University Business School China, China;4. West Texas A&M University, Canyon, TX, United States |
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| Abstract: | This study examines the disciplining effects of credit markets on firms’ corporate tax avoidance strategies. We show that, during adverse credit market conditions, firms with refinancing needs prefer to limit the after-tax cash flow benefits of tax avoidance to regain access to traditionally risk-averse credit markets. Our results show that firms increase their cash effective tax rate by two percentage points when facing refinancing constraints, and this effect is more pronounced for firms with lower asset redeployability and higher default probability. However, corporate governance mechanisms mitigate the relationship between tax avoidance and credit refinancing. Moreover, we show that firms decrease their tax avoidance strategies while leaving their leverage and debt shield unchanged. Overall, our findings are consistent with the observation that credit markets put pressure on tax-avoiding firms and contribute to the policy debate on disciplining tax avoiders. |
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| Keywords: | Credit refinancing Credit market discipline Financial policy Refinancing constraints Tax avoidance Tax planning G32 H25 H26 M41 |
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