Effect of Corporate Tax Avoidance Activities on Firm Bankruptcy Risk

Authors

Anirudh Dhawan, University of Wollongong
Liangbo Ma, University of WollongongFollow
Maria H. Kim, University of WollongongFollow

RIS ID

142188

Publication Details

Dhawan, A., Ma, L. & Kim, M. H. (2020). Effect of Corporate Tax Avoidance Activities on Firm Bankruptcy Risk. Journal of Contemporary Accounting and Economics, 16 (2), 100187-1-100187-23.

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.