Last modified: 2017-07-06
Abstract
This study examines whether tax avoidance is associated with corporate debt policy. Especially, this study investigates the influence of the bond investors and financial institutions such as the banks, which are long-term loans owner on CG, given for a comprehensive relationship between tax avoidance and debt ratio. Moreover, in the Japanese financial market, the financial institutions have a relatively bigger role for indirect finance, compared with European and U.S. financial market. In addition, in the other Asian nations their financial institutions seem to take on the same responsibility as in Japan.
This study firstly investigates the association between debt ratio and corporate tax avoidance. Secondly, we examine the influence of effectiveness of debt governance on the debt ratio and CG. Thirdly, we focus on the representative tools, such as outside directors and auditors for CG and corporate tax avoidance. Finally, we test the influence of the main banks on this effect because, in addition to their monitoring role, main banks also play a significant advisory role and are thus likely to be in a better position to make superior decisions about the firm's optimal debt and capital structure mix.
According to the main result of this study, it seems that debt enhancement effect is more dominant than debt substitution effect in Japanese firms. When a tax avoidance advances, firms’ profitability rises. Thus, considering affordance for loan by the financial institution, they can borrow it more. With regard to interactive effect among corporate governance, debt policy, and tax avoidance, we find CG of firms strengthen when they carry out tax avoidance. Considering increasing outside director ratio, the monitoring function of the debtholders improves due to the enhancement of CG functions and our result suggests that the financial institutions in Japan achieve a monitoring function.