Tax Risk and Cost of Debt: The Role of Tax Avoidance—Evidence from the Iraqi Stock Market

Hussen Amran Naji Al-Refiay (), Jasim Idan Barrak, Asif Isam Elaibi Al-Tameemi and Mohammadreza Pazhohi
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Hussen Amran Naji Al-Refiay: Department of Accounting, Administrations & Economics, University of Kerbala, Kerbala 964335027, Iraq
Jasim Idan Barrak: Department of Accounting, Administrations & Economics, University of Kerbala, Kerbala 964335027, Iraq
Asif Isam Elaibi Al-Tameemi: Department of Economics and Administrative Sciences, Imamreza University, Mashhad 9138833186, Iran
Mohammadreza Pazhohi: Department of Economics and Administrative Sciences, University of Shiraz, Shiraz 7194684471, Iran

Risks, 2025, vol. 13, issue 2, 1-24

Abstract: Taxes represent a significant expense for many companies, prompting a strong incentive to minimize tax liabilities through strategies known as tax avoidance. This research explores the impact of tax avoidance and tax risk disclosure on the cost of debt among companies listed on the Iraqi Stock Exchange. This study analyzes data from 33 firms from 2016 to 2021, employing multivariate linear regression and the generalized least squares (GLS) model to test the hypotheses. The findings indicate that tax avoidance significantly and positively affects the cost of debt, suggesting that firms engaging in tax avoidance may experience greater borrowing costs. Additionally, tax risk disclosure is shown to directly and significantly influence the cost of debt. Importantly, this study reveals that tax risk disclosure negatively moderates the relationship between accrual tax avoidance and the cost of debt, indicating that higher tax risk disclosure can reduce uncertainties associated with tax avoidance, reducing borrowing costs. These results imply that tax avoidance and its influence on corporate debt levels can affect the overall risk profile of a country's financial system. Understanding this relationship is crucial for governance measures aimed at managing tax risks effectively. Given the limited research in this area, this study contributes to the literature by examining how tax risk and tax avoidance relate to the cost of debt in an emerging market context.

Keywords: tax avoidance; tax risk; borrowing cost (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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