64 Pages Posted: 25 Sep 2013 Last revised: 20 Jan 2017
Date Written: January 19, 2017
A longstanding question is why an important fraction of U.S. public companies pay relatively large amounts in taxes, apparently forgoing the benefits of tax avoidance. This study finds that firms with high effective tax rates are, to some extent, less successful tax avoiders. These firms engage in tax avoidance activities but later return part of their tax savings to tax authorities in the form of a large tax payment. Moreover, this behavior is persistent as large past tax payments are predictive of large future tax payments and greater tax volatility. I further find that the prospect of large future tax payments and tax volatility are perceived as risks for which lenders penalize less successful tax avoiders with higher loan spreads. The effect is strongest for loans that have lower priority to tax obligations, firms with more recent large tax payments, and firms that either disclose a tax settlement or do not explain their large tax payments.
Keywords: Tax Avoidance, Debt Contracting, Tax Volatility, Tax Disclosures, Tax Settlements, Under-sheltering Puzzle
JEL Classification: G21, G28, G32, H25, H32
Suggested Citation: Suggested Citation