Does Credit Rating Conservatism Matter for Corporate Tax Avoidance?
2021 · Published in Accounting & Finance 61(4): 5681–5730 · DOI 10.1111/acfi.12773
PDF of Does Credit Rating Conservatism Matter for Corporate Tax Avoidance?
In one sentence
When credit rating agencies become more conservative, firms engage in more tax planning.
Summary
The paper studies whether credit rating conservatism affects corporate tax avoidance, using the passage of the Dodd–Frank Act and the US sovereign downgrade as quasi-natural experiments. In both settings, treated firms engage in more tax-planning activities than control firms. In the larger Dodd–Frank sample, the effects are concentrated among firms with more existing tax-planning capacity, less use of external financing, greater reliance on rating information and weaker external monitoring. The evidence indicates that rating conservatism plays a role in firms’ tax-avoidance decisions.
Abstract as published
Using the passage of Dodd‐Frank and the US sovereign downgrade as quasi‐natural experiments, we examine the effect of credit rating conservatism on corporate tax avoidance. We find that treatment firms engage in more tax‐planning activities than control firms in both research settings. We further find that these effects are driven mainly by firms with large existing tax‐planning capacity, firms with decreased use of external financing, firm with more reliance on rating information, and firms with weak external monitoring using the large Dodd‐Frank sample. Overall, the findings provide evidence that credit rating conservatism plays a role in corporate tax‐avoidance decisions.
Citation
Tao Chen, Sidney Leung, Lingmin Xie (2021). Does credit rating conservatism matter for corporate tax avoidance?. Accounting & Finance, 61(4), 5681–5730. https://doi.org/10.1111/acfi.12773
BibTeX
@article{chen2021credit,
title = {{Does credit rating conservatism matter for corporate tax avoidance?}},
author = {Tao Chen and Sidney Leung and Lingmin Xie},
journal = {Accounting \& Finance},
year = {2021},
volume = {61},
number = {4},
pages = {5681--5730},
doi = {10.1111/acfi.12773}
}