Corporate tax avoidance and debt costs

Journal of the American Taxation Association

Accounting

Journal of the American Taxation Association 2020 Vol 42:2 p 117-143

Shevlin T;Urcan O;Vasvari F P

Florin Vasvari

2020

We use path analysis to investigate how corporate tax avoidance is priced in bond yields and bank loan spreads. We find that approximately one half of the total effect of tax avoidance on bond yields is explained through the negative effect of tax avoidance on future pre-tax cash flow levels and volatility and, to a lesser extent, lower information quality. The effects of these mediating variables are much less pronounced for bank loan spreads. The results of additional cross-sectional analyses indicate that, relative to bond investors, banks are able to reduce information asymmetry problems more effectively, given their access to firms’ private information and greater ability to monitor borrowers.

Corporate tax avoidance; Public debt yields; Bank loan spreads; Path analysis

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