XXV Edition

1-2 December 2016"

Do Creditor Control Rights Impact Corporate Tax Avoidance? Evidence from Debt Covenant Violations

Francis Bill, Rensselaer Polytechnic Institute
Shena Yinjie (Victor) , Rensselaer Polytechnic Institute
Wu Qiang , Rensselaer Polytechnic Institute

We examine the effect of bank interventions on corporate tax avoidance activities via the lens of debt covenant violations. Using three different identification strategies, we provide evidence that bank interventions have a negative effect on corporate tax avoidance activities. This effect is less pronounced for financially constrained firms or firms with higher shareholder power. Covenant violating firms compensate their reduced tax avoidance activities with reduction in other expenditures such as R&D expenditures, capital expenditures, and acquisitions. Evidence also suggests that an increase in tax avoidance activities leads to a relatively less increase in firm value for firms that violate covenants compared to matched firms that do not violate covenants. Our paper contributes to the debate on whether creditors perceive tax avoidance to be beneficial or risk engendering and highlights the subtle differences between creditor governance and shareholder governance

Area: Banking

Keywords: Covenant violations; tax avoidance; creditor control rights.

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