Peer Benchmarking Tax Avoidance for Cost of Debt

44 Pages Posted: 8 Oct 2019 Last revised: 23 Oct 2019

See all articles by Mariya Letdin

Mariya Letdin

Florida State University

Cathryn Meegan

Florida State University

Miles A. Romney

Florida State University

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law

Date Written: October 16, 2019

Abstract

We show that managers can significantly lower corporate borrowing costs by adjusting effective tax rates. While prior research suggests a positive linear relation between tax avoidance and cost of debt, we document a U-shaped relation in which bondholders reward “undersheltering” firms with a decreasing cost of debt for increasing their tax avoidance until a point at which the relation reverses. As firms move toward the most aggressive tax avoidance levels, their cost of debt increases. Our study is the first we are aware of to provide evidence of a non-linear, U-shaped relation between tax avoidance and cost of debt. Additionally, we provide evidence suggesting that the range of effective tax rates corresponding to lowest borrowing costs varies greatly by industry. We show that managers can lower costs of debt (average yield savings of 1.37%) by benchmarking their firm’s tax avoidance relative to their industry peers.

Keywords: Tax Avoidance, Undersheltering, Tax Strategy, Cost of Debt

JEL Classification: G21, G32, H26

Suggested Citation

Letdin, Mariya and Meegan, Cathryn and Romney, Miles A. and Sirmans, C. F., Peer Benchmarking Tax Avoidance for Cost of Debt (October 16, 2019). Available at SSRN: https://ssrn.com/abstract=3460713 or http://dx.doi.org/10.2139/ssrn.3460713

Mariya Letdin

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States

Cathryn Meegan

Florida State University ( email )

Tallahasse, FL 32306
United States

Miles A. Romney (Contact Author)

Florida State University ( email )

Tallahasse, FL 32306
United States

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law ( email )

Tallahasse, FL 32306
United States
850 644-4076 (Phone)

HOME PAGE: http://www.cob.fsu.edu/rmi

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