Tax avoidance and cost of debt: The case for loan-specific risk mitigation and public debt financing
Adnan Anil Isin
Journal of Corporate Finance, 2018, vol. 49, issue C, 344-378
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 risk taking. 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.
Keywords: Tax avoidance; Cost of debt; Agency costs; Contract design and risk mitigation; Financial constraints; Information asymmetries (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:49:y:2018:i:c:p:344-378
Access Statistics for this article
Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter
More articles in Journal of Corporate Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().