Tax Uncertainty And Corporate Bonds' Credit Spread

The bond market is an important constituent of capital market,bond financing is also one of the main financing channels for corporates.In recent years,China's bond market has made considerable progress,but the corporate bond market is still relatively weak especially compared with stock market.After the break of "rigid payment" of corporate bonds,credit default risk is the "Sword of Damocles" that hangs over the corporate bond market.Under this background,this article examines the influencing factors of corporate bond credit spreads and focuses on the impaction and mechanism of corporate tax decisions on credit spreads.According to the definition of McGuire et al.,tax uncertainty refers to the uncertainty or volatility of corporates' future tax expenditures.Corporate tax avoidance,changes in taxation systems and policies and tax compliance ambiguity are the main sources of tax uncertainty.This article points out that based on the structure pricing model of risky bonds proposed by Merton,corporate tax uncertainty will affect corporate capital structure and asset value volatility through corporate risk,investment decisions,dividend policies,cash holdings and corporate values,and therefore affect credit spreads of corporate bonds.At the same time,corporate tax uncertainty and its sources will aggravate the existing information asymmetry and agency conflicts in corporates.Considering all of these,the creditors will increase the risk premium to deal with the impactions of tax uncertainty for adverse selection,and thus push up the corporate bond credit spreads.From the perspective of corporate taxation,this paper makes use of the corporate bonds data of China's listed companies from 2009-2016 to empirically examine the relationship between corporate tax uncertainty and corporate bonds' credit spread.The results show that the corporate tax uncertainty can significantly increase credit spread,and the change model also proves that the changes of tax uncertainty can explain the changes of credit spread to a certain degree.This positive relationship between tax uncertainty and credit spread is still significant after several robust tests,which means that the tax uncertainty is a different influencing factor for corporate bonds from tax premium and the investors regard the tax uncertainty as risk and thus ask for a higher risk premium.Moreover,this paper further examines whether the various corporate governance structures and mechanisms can moderate this relationship.For the internal governance structures,I find that the nature of equity,the level of management compensation and the proportion of independent directors can significantly reduce the positive impact of tax uncertainty on credit spread,but the management share-holding and the size of board of directors can strengthen this influence.I find no significant governance effect of equity concentration and duality.As for the external governance mechanisms,I find the tax administration and product market competition power can significantly weaken this relationship,while the degree of industry competition is on the contrary.This paper reveals the impact of taxation risk on corporate bonds for the first time,enriches the relevant research in the field of taxation and credit spread,and is helpful for investors' investment decision-making and improvement of governance mechanisms.Besides,the conclusions of this paper also contribute to the further research of corporate bonds and bond market,promoting the deeper reform and sustainable development of market economy,strengthening the financial intermediary function of capital market,avoiding and preventing credit risk and enabling the bond market to serving the real economy better.