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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)
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Abstract

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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

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.

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