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Article
Publication date: 11 January 2022

Sungsil Lee

This study aims to examine how the effect of corporate tax avoidance on the cost of debt has changed in the period 1993–2017. Although it is known that tax avoidance has…

Abstract

Purpose

This study aims to examine how the effect of corporate tax avoidance on the cost of debt has changed in the period 1993–2017. Although it is known that tax avoidance has significantly increased during this period (Dyreng et al., 2017), little evidence exists on how this change alters the effect of tax avoidance on the cost of debt. This study investigates how changes in tax avoidance modify the association between tax avoidance and the cost of debt.

Design/methodology/approach

By using a comprehensive sample of 15,825 loan facilities issued to US public firms in the period 1993–2017, this study tests the time-series changes in the association between tax avoidance and the cost of debt.

Findings

This study finds that a positive association between tax avoidance and the cost of debt has been declined over the past 25 years. Accordingly, tax avoidance in general no longer increases the loan spread after the enactment of domestic production activities deduction. However, the risker end of tax avoidance does still increase the loan spread.

Originality/value

This study spotlights the time-series changes in the effect of corporate tax avoidance on the cost of debt, showing how lenders perception on corporate tax avoidance has altered in accordance with changes in corporate tax practice.

Details

Pacific Accounting Review, vol. 34 no. 2
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 2 October 2017

Dirk Kiesewetter and Johannes Manthey

This paper aims to answer how corporate governance and corporate social responsibility (“CSR”) affect the relationship between value creation and tax avoidance. This study further…

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Abstract

Purpose

This paper aims to answer how corporate governance and corporate social responsibility (“CSR”) affect the relationship between value creation and tax avoidance. This study further analyses the impact of the institutional environment, i.e. whether a country is rather a liberal or a coordinated market economy, on the relationship between CSR and tax avoidance.

Design/methodology/approach

The empirical analysis comprises a panel data set of 7,924 observations for the years from 2005 to 2014 for European companies. The relationship between value creation and tax avoidance is tested by grouping the sample in high and low CSR performers. Similarly, the impact of the type of market economy is analysed for the firms.

Findings

The research design does not find evidence that tax avoidance is creating value. The empirical findings reveal that there is a positive relationship between value creation and the effective tax rate for firms with low social and environmental characteristics. Further, this analysis could show that stronger corporate governance is associated with a lower effective tax rate in both coordinated and liberal market economies. The analysis identifies social strengths being associated with a higher effective tax rate for coordinated market economies.

Practical implications

It is proposed to encourage CSR disclosure. The creation of incentives for social strengths could increase tax revenue. Firms should reconsider whether the engagement in tax avoidance is worth it and pursue social responsibility to achieve higher value creation for their stakeholders.

Originality/value

The paper challenges the intuitive expectation that tax avoidance creates value. It is suggested that the governance and CSR culture, as well as the tax legislation in Europe, is different to the USA. Conclusively, tax avoidance is not generating value for the European sample.

Details

Corporate Governance: The International Journal of Business in Society, vol. 17 no. 5
Type: Research Article
ISSN: 1472-0701

Keywords

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