This paper examines the effect of corporate taxation on the cost of credit. We employ corporate income tax rate changes across the U.S. states as a quasi-natural experiment to examine their implications on the pricing of syndicated loans. We find that changes in the state corporate tax rates have an asymmetric effect on the cost of credit: loan spreads decrease by approximately 5.9 basis points in response to a one percentage tax cut in the borrower’s state, but they are insensitive to corporate tax rises. We show that the easing effect of tax cuts comes from changes in credit demand by firms and is primarily concentrated in firms with greater reliance on debt and own funds. The transmission of corporate tax cuts to loan spreads depends on the firm’s access to alternative financing sources as firms with access to bond financing benefit to a greater extent.
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