Debt Maturity and Tax Avoidance

Abstract

This study proposes and empirically tests the argument that creditors are likely to extend debt with a shorter maturity to tax-avoiding firms so that they can frequently reevaluate tax-related risk in debt contracting. Using effective tax rates and uncertain tax benefits as a proxy for tax avoidance, I find that tax-avoiding firms have a larger proportion of short-maturity debt compared to other firms. The empirical findings further show that firms with unsustainable tax positions and with subsidiaries in tax-haven countries are more likely to employ short-maturity debt. Collectively, the empirical findings suggest that frequent debt renegotiations increase the exposure of tax-avoiding firms to credit supply shocks, contributing to their higher demand for cash.

Keywords: tax avoidance, debt maturity, tax audit risk