External capital market frictions, corporate governance, and tax avoidance: Evidence from the TED spread

Karen Aparicio and Ryoonhee Kim

Finance Research Letters, 2023, vol. 52, issue C

Abstract: This study investigates whether corporate tax avoidance can benefit shareholders when external capital market frictions are high. Using the TED spread as an exogenous shock to firm financial constraint, the study documents that firms tend to reduce their effective tax rates more aggressively when external financing is very costly. This negative relation is stronger in industries more sensitive to TED. Furthermore, we find that the positive effect of TED on tax avoidance is more pronounced within firms with good corporate governance. Our final analyses suggest that the tax-savings during the time of high external market frictions positively affect firm value and the positive effect on firm value is stronger within firms with good corporate governance.

Keywords: External capital market frictions; Financial constraint; Corporate governance; Tax avoidance (search for similar items in EconPapers)
JEL-codes: E69 G30 H25 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s154461232200558x

DOI: 10.1016/j.frl.2022.103381

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