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Corporate tax avoidance and trade credit

Corporate tax avoidance and trade credit We examine the relationship between corporate tax avoidance and reliance on trade credit. Using a sample of US listed firms during the period 1987–2017, we show that tax-avoiding firms rely more on supplier-provided trade credit as a source of financing. We take advantage of the ‘check-the-box’ regulation introduced in 1997 as an exogenous shock to firms’ tax strategies. The findings from the difference-in-differences design suggest a causal interpretation of our results. We also observe that the relationship between tax avoidance and trade credit is more salient for a sub-sample of firms with: (i) more information asymmetry; and (ii) more financing constraints. These findings remain robust to a battery of sensitivity analyses and endogeneity concerns. In an additional analysis, we find that corporate tax avoidance increases firms’ reliance on trade credit by reducing access to bank loans. Overall, we provide evidence that tax avoidance has important implications for a valuable alternative source of financing: trade credit. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting and Business Research Taylor & Francis

Corporate tax avoidance and trade credit

Hasan, Mostafa Monzur; Habib, Ahsan
Accounting and Business Research , Volume OnlineFirst: 30 – Apr 28, 2023
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References (91)

Publisher
Taylor & Francis
Copyright
© 2023 Informa UK Limited, trading as Taylor & Francis Group
ISSN
2159-4260
eISSN
0001-4788
DOI
10.1080/00014788.2023.2196052
Publisher site
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Abstract

We examine the relationship between corporate tax avoidance and reliance on trade credit. Using a sample of US listed firms during the period 1987–2017, we show that tax-avoiding firms rely more on supplier-provided trade credit as a source of financing. We take advantage of the ‘check-the-box’ regulation introduced in 1997 as an exogenous shock to firms’ tax strategies. The findings from the difference-in-differences design suggest a causal interpretation of our results. We also observe that the relationship between tax avoidance and trade credit is more salient for a sub-sample of firms with: (i) more information asymmetry; and (ii) more financing constraints. These findings remain robust to a battery of sensitivity analyses and endogeneity concerns. In an additional analysis, we find that corporate tax avoidance increases firms’ reliance on trade credit by reducing access to bank loans. Overall, we provide evidence that tax avoidance has important implications for a valuable alternative source of financing: trade credit.

Journal

Accounting and Business Research – Taylor & Francis

Published: Apr 28, 2023

Keywords: tax avoidance; trade credit; financing constraints; information asymmetry; G30; G32; H26

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