Tax Avoidance and Cost of Debt: The Case for Loan-Specific Risk Mitigation and Public Debt Financing
Journal of Corporate Finance
© 2018. This version is available under a Creative Commons Attribution Non-Commercial No Derivatives License: https://creativecommons.org/licenses/by-nc-nd/4.0/
Reason for embargo
Under embargo until 16 July 2019 in compliance with publisher policy
Examining the syndicate loans market for publicly traded U.S. firms I show that tax avoidance is positively related to loan spreads. Importantly, however, tax-specific premiums disappear for loans with large number of co-leads, which facilitate credit risk diversification, for loans with performance pricing provisions, which facilitate borrower-lender incentive alignment, and for borrowers with CDS contracts, which facilitate credit risk transfer. Moreover, non-bank institutional investors demand higher risk premiums to compensate for their high-risk investment strategies that also account for tax-specific risks and do not have particular focus on tax-specific firm risks. Finally, I show that simultaneous access to private and public debt financing, which reflects greater firm-level financial flexibility and fewer hold-up problems, largely mitigates agency risks associated with all forms of tax avoidance. These syndicate-level risk-mitigating measures work jointly well and are more effective, ex-ante, at moderating tax-specific risks in comparison to maintenance-based covenant structures alone. These results help identify channels through which firms can mitigate non-tax costs associated with tax avoidance and, hence, effectively pursue strategies that persistently reduce their corporate tax liabilities without incurring material agency costs.
This is the author accepted manuscript. The final version is available from Elsevier via the DOI in this record
Published online 16 January 2018