Corporate Tax Avoidance and Debt Costs

Forthcoming Journal of the American Taxation Association

53 Pages Posted: 18 Jul 2019

See all articles by Terry J. Shevlin

Terry J. Shevlin

University of California-Irvine

Oktay Urcan

University of Illinois at Urbana-Champaign

Florin P. Vasvari

London Business School

Date Written: July 18, 2019

Abstract

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.

Keywords: Corporate Tax Avoidance, Public Debt Yields, Bank Loan Spreads, Path Analysis

JEL Classification: G31, G32, M10, O16

Suggested Citation

Shevlin, Terry J. and Urcan, Oktay and Vasvari, Florin P., Corporate Tax Avoidance and Debt Costs (July 18, 2019). Forthcoming Journal of the American Taxation Association. Available at SSRN: https://ssrn.com/abstract=3422190

Terry J. Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Oktay Urcan (Contact Author)

University of Illinois at Urbana-Champaign ( email )

515 E. Gregory Drive
4009 BIF MC-520
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)

HOME PAGE: http://business.illinois.edu/profile/oktay-urcan/

Florin P. Vasvari

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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