Rollover Risk and Tax Avoidance

Wulung Li, Chunchi Wu, Shu‐Ling Wu and Kenneth Zheng

Journal of Business Finance & Accounting, 2025, vol. 52, issue 4, 1890-1924

Abstract: We investigate the association between rollover risk, measured as long‐term debt maturing in the current year deflated by total assets, and tax avoidance, measured as the cash effective tax rate. Consistent with cash being particularly valuable for firms with high‐rollover risk, we find that firms pay less in cash taxes when the amount of long‐term debt becoming due is significant relative to total assets. This finding contrasts with that of Alexander and Pisa, who scale debt due in the current year by total long‐term debt. We also find that the positive association between rollover risk and tax avoidance strengthens for firms with more severe financial constraints. Firms with high‐rollover risk appear to use tax‐related cash for debt repayment to reduce their refinancing needs. Moreover, rollover risk firms engaging in tax avoidance benefit from a lower probability of future firm failure. Additional tests corroborate our main finding in that the positive relation between rollover risk and tax avoidance is stronger for firms with greater information asymmetry or default risk and weaker for firms with greater financial flexibility. Finally, we find that firms avoid cash taxes preemptively in preparation for long‐term debt maturing beyond 1 year. Our results highlight the interdependence of corporate financial and tax policy decisions.

Date: 2025
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