TY - JOUR

T1 - Tax avoidance, tax risk and the cost of debt in a bank-dominated economy

AU - Kovermann, Jost Hendrik

PY - 2018/11/27

Y1 - 2018/11/27

N2 - Purpose: The purpose of this paper is to investigate whether tax avoidance has a positive or negative effect on firms’ cost of debt. It further investigates whether the implications for the cost of debt are different for tax avoidance and tax risk. Design/methodology/approach: Based on a sample of 201 firms listed on Frankfurt Stock Exchange from 2009 to 2014, three tests are performed using pooled OLS regression. Controlling for numerous variables that have been found to influence the cost of debt, a first model examines the relationship between tax avoidance and the cost of debt. A second model examines the relationship between tax risk and the cost of debt and a third model interacts tax avoidance with tax risk. Findings: The results show that tax avoidance has a negative effect on the cost of debt; however, tax risk increases the cost of debt. These results indicate that creditors generally view tax avoidance as positive and that tax avoidance is not regarded as inherently risky. Although tax avoidance is rewarded by capital markets with lower interest rates, tax risk contributes to higher interest rates. The effect of tax avoidance on the cost of debt depends therefore on the level of tax risk. Originality/value: This paper contributes to two distinct strands of research: literature investigating the driving factors behind the cost of debt and literature investigating the consequences of firms’ tax avoidance activities.

AB - Purpose: The purpose of this paper is to investigate whether tax avoidance has a positive or negative effect on firms’ cost of debt. It further investigates whether the implications for the cost of debt are different for tax avoidance and tax risk. Design/methodology/approach: Based on a sample of 201 firms listed on Frankfurt Stock Exchange from 2009 to 2014, three tests are performed using pooled OLS regression. Controlling for numerous variables that have been found to influence the cost of debt, a first model examines the relationship between tax avoidance and the cost of debt. A second model examines the relationship between tax risk and the cost of debt and a third model interacts tax avoidance with tax risk. Findings: The results show that tax avoidance has a negative effect on the cost of debt; however, tax risk increases the cost of debt. These results indicate that creditors generally view tax avoidance as positive and that tax avoidance is not regarded as inherently risky. Although tax avoidance is rewarded by capital markets with lower interest rates, tax risk contributes to higher interest rates. The effect of tax avoidance on the cost of debt depends therefore on the level of tax risk. Originality/value: This paper contributes to two distinct strands of research: literature investigating the driving factors behind the cost of debt and literature investigating the consequences of firms’ tax avoidance activities.

KW - Management studies

KW - Tax avoidance

KW - Tax risk

KW - Tax avoidance

KW - Banks

KW - Tag aggresiveness

KW - Cost of debt

KW - Credit risk

KW - Banks

KW - Cost of debt

KW - Credit risk

KW - Tax aggressiveness

KW - Tax avoidance

KW - Tax risk

UR - http://www.scopus.com/inward/record.url?scp=85055999257&partnerID=8YFLogxK

U2 - 10.1108/MAJ-12-2017-1734

DO - 10.1108/MAJ-12-2017-1734

M3 - Journal articles

VL - 33

SP - 683

EP - 699

JO - Managerial Auditing Journal

JF - Managerial Auditing Journal

SN - 0268-6902

IS - 8/9

ER -