CEO tax burden and debt contracting

We examine how locked-in CEO equity attributable to large unrealized capital gains tax liabilities influences the cost and restrictiveness of debt contracts. We find that firms enjoy lower loan spreads and are more (less) likely to receive ratings upgrades (downgrades) when their CEO has a large tax burden. Using the capital gains tax rate decrease in the Tax Reform Act of 1997 as an exogenous shock to CEO tax burdens, we find that CEOs with large tax burdens before the tax cut experience a sharp increase in loan spreads afterward. This increase in spreads is larger when the firm has low profitability, high bankruptcy risk, and when loans are unsecured. Further, CEO tax burdens decrease the restrictiveness of nonprice loan terms, increase syndicate size, and decrease issue costs.