Corporate tax avoidance and trade credit

Mostafa Monzur Hasan*, Ahsan Habib

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)700-729
Number of pages30
JournalAccounting and Business Research
Volume54
Issue number6
Early online date5 May 2023
DOIs
Publication statusPublished - 2024

Keywords

  • tax avoidance
  • trade credit
  • financing constraints
  • information asymmetry

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