Effect of corporate tax avoidance activities on firm bankruptcy risk

Anirudh Dhawan, Liangbo Ma and Maria H. Kim

Journal of Contemporary Accounting and Economics, 2020, vol. 16, issue 2

Abstract: 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.

Keywords: Tax avoidance; Bankruptcy risk; Thin capitalization; Tax risk (search for similar items in EconPapers)
JEL-codes: G33 H26 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:16:y:2020:i:2:s1815566920300059

DOI: 10.1016/j.jcae.2020.100187

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