Tax avoidance and the cost of debt for SMEs: Evidence from Spain

Juan Pedro Sánchez-Ballesta and José Yagüe

Journal of Contemporary Accounting and Economics, 2023, vol. 19, issue 2

Abstract: We investigate the effect of tax avoidance on the cost of debt for SMEs. Tax avoidance may increase a firm’s cash flows on one hand, but also increase the agency costs, the information risk, and the risk of scrutiny by tax authorities on the other, affecting the cost of debt in opposing ways. Using a sample of Spanish SMEs for the period 2007–2019, our findings show that tax-avoiding SMEs face lower debt costs, suggesting that the positive effects of tax avoidance prevail over the negative ones for SMEs. This finding is consistent with a more favourable assessment of SMEs’ tax avoidance activities by their key finance providers (banks), given SME unique characteristics and their lower agency costs.

Keywords: Tax Avoidance; Debt cost; Banks; SMEs (search for similar items in EconPapers)
JEL-codes: M41 M48 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:19:y:2023:i:2:s1815566923000127

DOI: 10.1016/j.jcae.2023.100362

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