Do creditor control rights impact corporate tax aggressiveness? Evidence from debt covenant violations

Abstract

AbstractWe examine the effect of bank interventions on corporate tax aggressiveness via the lens of debt covenant violations. Using three identification strategies, we find that bank interventions have a negative effect on corporate tax aggressiveness. This effect is less pronounced for more financially constrained firms, firms with higher shareholder power and firms facing less powerful banks. Covenant‐violating firms compensate their reduced tax aggressiveness by reducing other expenditures, including capital expenditures and cash acquisitions. Our results suggest that creditors perceive aggressive tax activities as risky investment opportunities.