Hostname: page-component-77c89778f8-swr86 Total loading time: 0 Render date: 2024-07-17T21:51:22.206Z Has data issue: false hasContentIssue false
  • English
  • Français

The Role of Creditor Protection in Lending and Tax Avoidance

Published online by Cambridge University Press:  12 October 2022

Antonio De Vito Open the ORCID record for Antonio De Vito [Opens in a new window]  and
Martin Jacob Open the ORCID record for Martin Jacob [Opens in a new window]
Antonio De Vito
Affiliation:
IE University IE Business School antonio.de.vito@ie.edu
Martin Jacob*
Affiliation:
WHU – Otto Beisheim School of Management
*
martin.jacob@whu.edu (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine how creditor rights affect the trade-off between non-debt and debt tax shields. Using four bankruptcy reforms and a panel of private and public firms from Italy, we show that laws empowering creditors reduce tax avoidance and increase debt financing, consistent with firms substituting non-debt tax shields with debt tax shields. We corroborate the validity of our findings using a panel of public firms across 33 countries. Additionally, we document that the impact of creditor protection laws is mitigated by tax system characteristics, which significantly reduce the incentives to substitute tax avoidance with debt.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 5 , August 2023 , pp. 2096 - 2130
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are especially grateful to two anonymous referees, Mara Faccio (the editor), Pedro Gete, Marc Goergen, Juan-Pedro Gómez, Emanuele Rizzo (discussant), Burcin Yurtoglu, conference participants at the 2019 Finance Forum, and seminar participants at IE Business School, Pompeu Fabra University, and WHU–Otto Beisheim School of Management for many helpful comments. Antonio De Vito acknowledges that the research reported in this article was partially funded by the Ministry of Economy and Competitiveness of Spain, the State Research Agency, and European Regional Development Fund Grant No. PGC2018-101745-A-I00. Martin Jacob acknowledges funding by the German Research Foundation (Deutsche Forschungsgemeinschaft) Project-ID 403041268 – TRR 266 Accounting for Transparency.

References

Acharya, V.; Amihud, Y.; and Litov, L.. “Creditor Rights and Corporate Risk-Taking.” Journal of Financial Economics, 102 (2011), 150–166.CrossRefGoogle Scholar
Acharya, V., and Subramanian, K.. “Bankruptcy Codes and Innovation.” Review of Financial Studies, 22 (2009), 4949–4988.CrossRefGoogle Scholar
Acharya, V.; Sundaram, R. K.; and John, K.. “Cross-Country Variations in Capital Structures: The Role of Bankruptcy Code.” Journal of Financial Intermediation, 20 (2011), 25–54.CrossRefGoogle Scholar
Alexander, A.; De Vito, A.; and Jacob, M.. “Corporate Tax Reforms and Tax-Motivated Profit Shifting: Evidence from the EU.” Accounting and Business Research, 50 (2020), 309–341.CrossRefGoogle Scholar
Altshuler, R., and Auerbach, A. J.. “The Significance of Tax Law Asymmetries: An Empirical Investigation.” Quarterly Journal of Economics, 105 (1990), 61–86.CrossRefGoogle Scholar
Armstrong, C. S.; Blouin, J. L.; and Larcker, D. F.. “The Incentives for Tax Planning.” Journal of Accounting and Economics, 53 (2012), 391–411.CrossRefGoogle Scholar
Atwood, T. J.; Drake, M. S.; Myers, J. N.; and Myers, L. A.. “Home Country Tax System Characteristics and Corporate Tax Avoidance: International Evidence.” Accounting Review, 87 (2012), 1831–1860.CrossRefGoogle Scholar
Auerbach, A. J. “The Dynamic Effect of Tax Law Asymmetries.” Review of Economics Studies, 53 (1986), 205–225.CrossRefGoogle Scholar
Auerbach, A. J.; Devereux, M. P.; and Simpson, H.. “Taxing Corporate Income.” NBER Working Paper No. 14494 (2008).CrossRefGoogle Scholar
Ayotte, K. M., and Skeel, D. A. Jr. Why Do Distressed Companies Choose Delaware? An Empirical Analysis of Venue Choice in Bankruptcy. Mimeo: Columbia University (2004).Google Scholar
Bae, K., and Goyal, V.. “Creditor Rights, Enforcement and Bank Loans.” Journal of Finance, 64 (2009), 823–860.CrossRefGoogle Scholar
Baginski, S. P.; Hassell, J. M.; and Kimbrough, M. D.. “The Effect of Legal Environment on Voluntary Disclosure: Evidence from Management Earnings Forecasts Issued in U.S. and Canadian Markets.” Accounting Review, 77 (2002), 25–50.CrossRefGoogle Scholar
Beck, T.; Demirgüç-Kunt, A.; and Levine, R.. “Law and Finance: Why Does Legal Origin Matter?” Journal of Comparative Economics, 31 (2003a), 653–675.CrossRefGoogle Scholar
Beck, T., Demirgüç-Kunt, A.; and Levine, R.. “Law, Endowments, and Finance.” Journal of Financial Economics, 70 (2003b), 137–181.CrossRefGoogle Scholar
Bertrand, M.; Duflo, E.; and Mullainathan, S.. “How Much Should We Trust Difference-in Estimates?” Quarterly Journal of Economics, 119 (2004), 249–275.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.CrossRefGoogle Scholar
Bethmann, I.; Jacob, M.; and Müller, M. A.. “Tax Loss Carrybacks: Investment Stimulus versus Misallocation.” Accounting Review, 93 (2018), 101–125.CrossRefGoogle Scholar
Bradley, M.; Gregg, J.; and Han Kim, E.. “On the Existence of an Optimal Capital Structure.” Journal of Finance, 39 (1984), 857–878.CrossRefGoogle Scholar
Buettner, T.; Overesch, M.; Schreiber, U.; and Wamser, G.. “The Impact of Thin-Capitalization Rules on the Capital Structure of Multinational Firms.” Journal of Public Economics, 96 (2012), 930–938.CrossRefGoogle Scholar
Castro, R.; Clementi, G.; and MacDonald, G.. “Investor Protection, Optimal Incentives, and Economic Growth.” Quarterly Journal of Economics, 119 (2004), 1131–1175.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431–468.CrossRefGoogle Scholar
Cumming, D.; Filatotchev, I.; Knill, A.; Reeb, D. M.; and Senbet, L.. “Law, Finance, and the International Mobility of Corporate Governance.” Journal of International Business Studies, 48 (2017), 123–147.CrossRefGoogle Scholar
Cumming, D., Lopez-de-Silanes, F.; McCahery, J. A.; and Schwienbacher, A.. “Tranching in the Syndicated Loan Market Around the World.” Journal of International Business Studies, 51 (2020), 95–120.CrossRefGoogle Scholar
Daske, H.; Hail, L.; Leuz, C.; and Verdi, R.. “Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences.” Journal of Accounting Research, 46 (2008), 1085–1142.Google Scholar
Davidenko, S. A., and Franks, J. R.. “Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany and the UK.” Journal of Finance, 63 (2008), 565–608.CrossRefGoogle Scholar
De Simone, L. “Does a Common Set of Accounting Standards Affect Tax-Motivated Income Shifting for Multinational Firms?” Journal of Accounting and Economics, 61 (2016), 145–165.CrossRefGoogle Scholar
De Socio, A., and Finaldi Russo, P.. “The Debt of Italian Non-Financial Firms: An International Comparison.” Questioni di Economia e Finanza, 308 (2016), 5–37.Google Scholar
DeAngelo, H., and Masulis, R.. “Optimal Capital Structure Under Corporate and Personal Taxation.” Journal of Financial Economics, 8 (1980), 3–29.CrossRefGoogle Scholar
Demirgüç-Kunt, A., and Maksimovic, V.. “Law, Finance, and Firm Growth.” Journal of Finance, 53 (1998), 2107–2139.CrossRefGoogle Scholar
Demirgüç-Kunt, A., and Maksimovic, V.. “Institutions, Financial Markets, and Firm Debt Maturity.” Journal of Financial Economics, 54 (1999), 295–336.CrossRefGoogle Scholar
Dessaint, O.; Golubov, A.; and Volpin, P.. “Employment Protection and Takeovers.” Journal of Financial Economics, 125 (2017), 369–388.CrossRefGoogle Scholar
Dhaliwal, D.; Trezevant, R.; and Wang, S.. “Taxes, Investment-Related Tax Shields and Capital Structure.” Journal of the American Taxation Association, 14 (1992), 1–21.Google Scholar
Dharmapala, D. “Do Multinational Firms Use Tax Havens to the Detriment of Other Countries?” Working Paper, University of Chicago (2020).CrossRefGoogle Scholar
Djankov, S.; McLiesh, C.; and Shleifer, A.. “Private Credit in 129 Countries.” Journal of Financial Economics, 84 (2007), 299–329.CrossRefGoogle Scholar
Doidge, C., and Dyck, A.. “Taxes and Corporate Policies: Evidence from a Quasi-Natural Experiment.” Journal of Finance, 70 (2015), 45–89.CrossRefGoogle Scholar
Dyreng, S. D.; Hanlon, M.; and Maydew, E. L.. “Long-Run Corporate Tax Avoidance.” Accounting Review, 83 (2008), 61–82.CrossRefGoogle Scholar
Dyreng, S. D.; Hanlon, M.; and Maydew, E. L.. “The Effects of Executives on Corporate Tax Avoidance.” Accounting Review, 85 (2010), 1163–1189.CrossRefGoogle Scholar
Dyreng, S. D.; Hanlon, M.; Maydew, E. L.; and Thornock, J. R.. “Changes in Corporate Effective Tax Rates over the Past 25 Years.” Journal of Financial Economics, 124 (2017), 441–463.CrossRefGoogle Scholar
Dyreng, S. D., and Lindsey, B. P.. “Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on U.S. Multinational Firms’ Tax Rates.” Journal of Accounting Research, 47 (2009), 1283–1316.CrossRefGoogle Scholar
Edwards, A.; Schwab, C.; and Shevlin, T.. “Financial Constraints and Cash Tax Savings.” Accounting Review, 91 (2016), 859–881.CrossRefGoogle Scholar
El Ghoul, S.; Guedhami, O.; Kwok, C. C. Y., and Zheng, Y.. “The Role of Creditor Rights on Capital Structure and Product Market Interactions: International Evidence.” Journal of International Business Studies, 52 (2021), 141–147.CrossRefGoogle Scholar
Faccio, M., and Xu, J.. “Taxes and Capital Structure.” Journal of Financial and Quantitative Analysis, 50 (2015), 277–300.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Capital Structure Choices.” Critical Finance Review, 1 (2012), 59–101.CrossRefGoogle Scholar
Fama, E. F., and Miller, M. H.. The Theory of Finance. Orlando, FL: Holt, Rinehart & Winston (1972).Google Scholar
Favara, G.; Morellec, E.; Schroth, E.; and Valta, P.. (2017) “Debt Enforcement, Investment, and Risk-Taking Across Countries.” Journal of Financial Economics, 123, 22–41.CrossRefGoogle Scholar
Gennaioli, N., and Rossi, S.. “Judicial Discretion in Corporate Bankruptcy.” Review of Financial Studies, 23 (2010), 4078–4114.CrossRefGoogle Scholar
Giannetti, M. “Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices.” Journal of Financial and Quantitative Analysis, 38 (2003), 185–212.CrossRefGoogle Scholar
Graham, J. R. “How Big are the Tax Benefits of Debt?” Journal of Finance, 55 (2000), 1901–1942.CrossRefGoogle Scholar
Graham, J. R. “Taxes and Corporate Finance: A Review.” Review of Financial Studies, 16 (2003), 1075–1129.CrossRefGoogle Scholar
Graham, J. R., and Leary, M. T.. “A Review of Capital Structure Research and Directions for the Future.” Annual Review of Financial Economics, 3 (2011), 309–345.CrossRefGoogle Scholar
Graham, J. R., and Tucker, A. L.. “Tax Shelters and Corporate Debt Policy.” Journal of Financial Economics, 81 (2006), 563–594.CrossRefGoogle Scholar
Guillén, M. F., and Capron, L.. “State Capacity, Minority Shareholder Protections, and Stock Market Development.” Administrative Science Quarterly, 61 (2015), 125–160.CrossRefGoogle Scholar
Hail, L., and Luez, C.. “International Differences in Cost of Capital: Do Legal Institutions and Securities Regulation Matter?” Journal of Accounting Research, 44 (2006), 485–531.CrossRefGoogle Scholar
Haselmann, R.; Pistor, K.; and Vig, V.. “How Law Affects Lending.” Review of Financial Studies, 23 (2010), 549–580.CrossRefGoogle Scholar
Heider, F., and Ljungqvist, A.. “As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes.” Journal of Financial Economics, 118 (2015), 684–712.CrossRefGoogle Scholar
Hoopes, J. L.; Mescall, D.; and Pittman, J. A.. “Do IRS Audits Deter Corporate Tax Avoidance?” Accounting Review, 87 (2012), 1603–1639.CrossRefGoogle Scholar
Houston, J. F.; Lin, C.; Liu, S.; and Wei, L.. “Litigation Risk and Voluntary Disclosure: Evidence from Legal Changes.” Accounting Review, 94 (2019), 247–272.CrossRefGoogle Scholar
Jappelli, T.; Pagano, M.; and Bianco, M.. “Courts and Banks: Effects of Judicial Enforcement on Credit Market.” Journal of Money, Credit and Banking , 37 (2005), 223–244.CrossRefGoogle Scholar
Jensen, M. C., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs, and Capital Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Kahle, K. M., and Shastri, K.. “Firm Performance, Capital Structure, and the Tax Benefits of Employee Stock Options.” Journal of Financial and Quantitative Analysis, 40 (2005), 135–160.CrossRefGoogle Scholar
Kemsley, D., and Nissim, D.. “Valuation of the Debt Tax Shield.” Journal of Finance, 57 (2002), 2045–2074.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Legal Determinants of External Finance.” Journal of Finance, 52 (1997), 1131–1150.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Law and Finance.” Journal of Political Economy, 106 (1998), 1113–1155.CrossRefGoogle Scholar
Laeven, L., and Majnoni, G.. “Does Judicial Efficiency Lower the Cost of Credit?” Journal of Banking and Finance, 29 (2005), 1791–1812.CrossRefGoogle Scholar
Levine, R. “Financial Development and Growth.” Journal of Economic Literature, 35 (1997), 688–726.Google Scholar
Levine, R. “The Legal Environment, Banks, and Long-Run Economic Growth.” Journal of Money, Credit, and Banking, 30 (1998), 596–613.CrossRefGoogle Scholar
Levine, R. “Law, Finance, and Economic Growth.” Journal of Financial Intermediation, 8 (1999), 8–35.CrossRefGoogle Scholar
Lin, S.; Tong, N.; and Tucker, A. L.. “Corporate Tax Aggression and Debt.” Journal of Banking and Finance, 40 (2014), 227–241.CrossRefGoogle Scholar
Lo Cascio, G. “La Nuova Displicina Dell’amministrazione Straordinaria.” Corriere Giuridico, 16 (1999), 1193–1196.Google Scholar
LoPucki, L. M. Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts. Ann Arbor, MI: University of Michigan Press (2005).Google Scholar
MacKie-Mason, J. K. “Do Taxes Affect Corporate Financing Decisions?” Journal of Finance, 45 (1990), 1471–1493.CrossRefGoogle Scholar
McClure, C. “How Costly is Tax Avoidance? Evidence from Structural Estimation.” Working Paper, University of Chicago (2020).CrossRefGoogle Scholar
Miller, M. H. “Debt and Taxes.” Journal of Finance, 32 (1977), 261–275.Google Scholar
Myers, S. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.CrossRefGoogle Scholar
OECD. Addressing Base Erosion and Profit Shifting. Paris, France: OECD Publishing (2013a).Google Scholar
OECD. Tax Administration 2013. Comparative Information on OECD and Other Advanced and Emerging Economies. Paris, France: OECD Publishing (2013b).Google Scholar
OECD. Measuring and Monitoring BEPS. Paris, France: OECD Publishing (2015a).Google Scholar
OECD. Tax Administration 2015. Comparative Information on OECD and Other Advanced and Emerging Economies. Paris, France: OECD Publishing (2015b).Google Scholar
OECD. Public Consultation document: Global Anti-Base Erosion Proposal—Pillar Two. Paris, France: OECD Publishing (2019a).Google Scholar
OECD. Revenue Statistics 2019. Paris, France: OECD Publishing (2019b).Google Scholar
OECD. Tax Policy Reforms 2020. OECD and Selected Partner Economies. Paris, France: OECD Publishing (2020).Google Scholar
Petersen, M. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.CrossRefGoogle Scholar
Qi, Y.; Roth, L.; and Wald, J. K.. “Creditor Protection Laws, Debt Financing, and Corporate Investment over the Business Cycle.” Journal of International Business Studies, 48 (2017), 477–497.CrossRefGoogle Scholar
Qian, J., and Strahan, P.. “How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans.” Journal of Finance, 62 (2007), 2803–2834.CrossRefGoogle Scholar
Rajan, R. G., and Zingales, L.. “What Do We Know About Capital Structure? Some Evidence from International Data.” Journal of Finance, 50 (1995), 1421–1460.CrossRefGoogle Scholar
Rego, S. O. “Tax-Avoidance Activities of U.S. Multinational Corporations.” Contemporary Accounting Research, 20 (2003), 805–833.CrossRefGoogle Scholar
Rego, S. O., and Wilson, R. J.. “Equity Risk Incentives and Corporate Tax Aggressiveness.” Journal of Accounting Research, 50 (2012), 775–810.CrossRefGoogle Scholar
Rodano, G.; Serrano-Velarde, N.; and Tarantino, E.. Bankruptcy Law and Bank Financing.” Journal of Financial Economics, 120 (2016), 363–382.CrossRefGoogle Scholar
Schiantarelli, F.; Stacchini, M.; and Strahan, P.. “Bank Quality, Judicial Efficiency, and Loan Repayment Delays in Italy.” Journal of Finance, 75 (2020), 2139–2178.CrossRefGoogle Scholar
Shevlin, T.; Thornock, J.; and Williams, B.. “An Examination of Firms’ Responses to Tax Forgiveness.” Review of Accounting Studies, 22 (2017), 577–607.CrossRefGoogle Scholar
Simintzi, E.; Vig, V.; and Volpin, P.. “Labor Protection and Leverage.” Review of Financial Studies, 28 (2015), 561–591.CrossRefGoogle Scholar
Trezevant, R. “Debt Financing and Tax Status: Tests of the Substitution Effect and the Tax Exhaustion Hypothesis Using Firms’ Responses to the Economic Recovery Tax Act of 1981.” Journal of Finance, 47 (1992), 1557–1568.CrossRefGoogle Scholar
Vig, V. “Access to Collateral and Corporate Debt Structure: Evidence from a Natural Experiment.” Journal of Finance, 68 (2013), 881–928.CrossRefGoogle Scholar
Wilde, J. H., and Wilson, R. J.. “Perspectives on Corporate Tax Planning: Observations from the Past Decade.” Journal of American Taxation Association, 40 (2018), 63–81.CrossRefGoogle Scholar
Supplementary material: PDF

De Vito and Jacob supplementary material

Online Appendix

Download De Vito and Jacob supplementary material(PDF)
PDF 845.5 KB