Do Lenders Price Tax Risk in the Debt Contract?
47 Pages Posted: 6 Dec 2018
Date Written: April 1, 2018
We investigate the relation between tax risk and the cost of private debt. Tax risk can lead to significant negative outcomes, including penalties, interest and additional tax payments, which in turn can increase the uncertainty of future cash flows and make it costlier for a firm to borrow. Consistent with our hypothesis, we find a significant, positive relation between the cost of borrowing and tax risk. In terms of economic significance, a one percent increase in our tax risk measure implies an interest rate increase of 4.04 basis points. We also find that lenders are more likely to require collateral, include more covenants, and issue smaller loans when borrowers have higher tax risk.
Keywords: tax risk, cost of bank loans
JEL Classification: G31, G32, H26, M41
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