Corporate Tax Avoidance and Bank Loan Contracting

Abstract

We examine the impact of corporate tax avoidance on the price and non-price terms of bank loans. We predict and provide evidence that banks charge lower loan spreads and impose fewer covenant restrictions when firms exhibit greater tax avoidance. These favorable effects are more pronounced for borrowers with higher credit risk and better governance. Firms with more effective tax avoidance are also less likely to violate covenant restrictions. Our results suggest that banks perceive tax avoidance as a credit quality improving factor and are willing to offer favorable loan contracting terms to successful tax-avoiding borrowers.

Keywords: Tax avoidance; loan contracting; credit risk

JEL Classification: G21; G32; H26