Abstract
This study examines the relation between executives’ inside debt holdings and corporate tax risk. As executives’ inside debt holdings are unsecured and unfunded, they should align executives’ interests with those of outside debtholders and incentivize executives to act more conservatively toward risk. Hence, inside debt should also reduce the risk of tax avoidance activities. Consistent with this prediction, we find that executive inside debt holdings are negatively related to tax risk. Further, this relation becomes stronger at higher levels of tax risk. We also find that the relation between insider debt and tax risk is stronger for firms that are not facing liquidity constraints and among well-governed firms. The latter result implies that institutional ownership and inside debt compensation are substitutes in reducing tax risk. Overall, our results suggest that part of the observed cross-sectional difference in tax avoidance can be explained by a reduction in tax risk that is related to executive inside debt holdings.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
