Risky High Effective Tax Rate Firms
Massachusetts Institute of Technology (MIT) - Sloan School of Management
May 31, 2014
Frequently researchers use a high effective tax rate as a proxy for firms that are non-tax planners and/or that are not exposed to significant tax-related risks. This study investigates whether high effective tax rate firms can be (1) exposed to significant tax-related risks and (2) faced with a tax-related risk premium when raising funds from external capital providers. First, I provide evidence that firms with high effective tax rates can have very risky tax-related cash flows. Moreover, disclosures suggest that these firms have risky tax-related cash flows in part due to aggressive tax deferral strategies, settlements with tax authorities, and, to a lesser extent, large repatriations of foreign earnings. Second, I find that lenders penalize these “risky high effective tax rate” firms with higher loan spreads, restrictions to pay out dividends, and collateral requirements (relative to firms that do not fall into this classification). Overall, this study contributes to the literature by providing initial evidence about the tax behavior of high effective tax rate firms.
Number of Pages in PDF File: 48
Keywords: Risky High ETR Firms, Tax Risk, Tax Avoidance, Disclosures, Debt Contracting
JEL Classification: G21, G28, G32, H25, H32
Date posted: September 25, 2013 ; Last revised: November 19, 2014
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