Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 3/2014:
Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans

Iftekhar Hasan (), Chun-Keung (Stan) Hoi, Qiang Wu and Hao Zhang

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; cost of bank loans; information risk; agency risk; audit risk; FIN 48; (follow links to similar papers)

JEL-Codes: G21; H26; (follow links to similar papers)

67 pages, January 15, 2014

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This paper is published as:
Hasan, Iftekhar, Chun-Keung (Stan) Hoi, Qiang Wu and Hao Zhang, (2014), 'Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans', Journal of Financial Economics, Vol. 113, July, No. 1, pages 109-130

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