Tax avoidance and cost of debt: evidence from a natural experiment in China

This study examines the impact of tax avoidance on the cost of debt using a natural experiment in China. Existing literatures identify two channels about how debt holders perceive tax avoidance behaviour. But there is no census on why and when one channel prevails or dominates the other one. Using China's New Regulation on bonds issuance in 2015 as a natural experiment, we find a negative (positive) association exists between tax avoidance and the cost of debt before (after) the New Regulation. We also find that both going public and state ownership have significant impacts on the tax avoidance and cost of debt relationship. Our findings suggest that debt holders' perception on tax avoidance behaviour varies with external corporate governance regulations.