Journal
JOURNAL OF CONTEMPORARY ACCOUNTING & ECONOMICS
Volume 16, Issue 2, Pages -Publisher
ELSEVIER SCI LTD
DOI: 10.1016/j.jcae.2020.100187
Keywords
Tax avoidance; Bankruptcy risk; Thin capitalization; Tax risk
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Corporate tax avoidance has been shown to raise the cost of bank debt and lower credit and bond ratings. However, it is unclear whether tax avoidance actually increases a firm's bankruptcy risk or whether it is just viewed negatively by banks and rating agencies. We find that firms engaging in tax avoidance and firms that are thinly capitalized face higher bankruptcy risk. To account for endogeneity and functional form misspecification, we verify our results using instrumental variable and propensity score matching methods. Our findings are consistent with the view that tax avoidance is a risk-enhancing activity. (C) 2020 Elsevier Ltd. All rights reserved.
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