Is Tax Volatility Priced by Lenders in the Syndicated Loan Market?

Saavedra, Daniel

doi:10.1080/09638180.2018.1520641

Cited by 38 publications

(50 citation statements)

References 27 publications

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“…Recent research examines the associations between various tax avoidance measures and proxies for risk, such as the volatility of stock returns, the cost of equity capital, and managers' equity risk incentives. Guenther et al () find a positive association between the volatility of cash ETRs and future stock return volatility, and Saavedra () investigates how interest rates vary for firms with annual cash ETRs exceeding 60 percent in any of the previous five years. Goh et al () find that less extreme forms of tax avoidance (measured as book‐tax differences (BTDs), permanent BTDs, and long‐run cash ETRs) significantly reduce the cost of capital.…”

Section: Background: Prior Literature Tax Risk Definition and Practmentioning

confidence: 99%

Assessing Tax Risk: Practitioner Perspectives

Neuman,

Omer,

Schmidt

2020

Contemporary Accting Res

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This study uses insights from tax practitioners and tax authorities to define and develop an estimate of ex ante tax risk that is independent of common tax outcomes studied in prior literature. Validation tests confirm that our tax risk measure (i) represents the predictable and unpredictable uncertainty inherent in the three sources of tax risk (i.e., economic risk, tax law uncertainty, and inaccurate information processing) and (ii) is a construct different from tax avoidance, tax uncertainty, and general business risk. Using our tax risk measure, we address two research questions of interest to academics and practitioners. First, we examine the association between tax risk and long‐run tax avoidance and find a negative association between tax risk and future long‐run cash effective tax rates (ETRs). Second, we consider the extent to which unrecognized tax benefits (UTBs) reflect tax risk, tax avoidance, or financial reporting incentives and demonstrate that our tax risk measure explains a substantial portion of UTBs, incremental and relative to measures of information risk, conditional conservatism, unconditional conservatism, and tax avoidance. Our study offers a measure of tax risk that, consistent with the Scholes‐Wolfson paradigm, reflects the tax risk inherent in all business activities, not just tax avoidance activities; has unique industry effects; and contributes to our understanding of the factors that affect tax planning decisions and result in variation in firms' ETRs. Our findings will help managers and tax practitioners focus on industry‐specific tax risk components, assess risk during tax planning initiatives, exercise caution when engaging in additional risk if ETRs are low, and adapt tax risk strategies to fit specific company needs. We enhance future tax research by improving the definition and measurement of tax risk.

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Section: Background: Prior Literature Tax Risk Definition and Practmentioning

confidence: 99%

Assessing Tax Risk: Practitioner Perspectives

Neuman,

Omer,

Schmidt

2020

Contemporary Accting Res

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“…The third component, settlements, of the cash ETR in equation includes both some recurring items, such as deductions for option compensation in excess of the grant‐date fair values in earnings, and nonrecurring items. Large payments to settle prior year taxes are infrequent (Saavedra ), as are refunds of prior years' taxes (Saavedra and Hughes ). By themselves, the nonrecurring items will give the appearance of mean‐reverting behavior, but the extent to which this affects the cash ETR depends on how large they are relative to the other components of the measure.…”

Section: Commentsmentioning

confidence: 99%

How Quickly Do Firms Adjust to Optimal Levels of Tax Avoidance?

Kim

McGuire²,

Savoy

et al. 2019

Contemporary Accting Res

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The trade‐off literature asserts that managers weigh the direct benefits of tax avoidance against the associated nontax costs. This literature implies each firm has a unique optimal level of tax avoidance that balances these costs and benefits. Our study is the first to document how quickly the average firm moves toward its optimal level of tax avoidance. We find that the typical firm converges toward its optimum at a rate that ranges from approximately 69 to 84 percent over a three‐year period, depending upon model specifications. Consistent with asymmetric levels of frictions across the tax avoidance distribution, we find the speed of adjustment is greater for firms below their optimal level of tax avoidance than for firms above. We perform additional cross‐sectional analyses to provide insight into some of the frictions that prevent firms from adjusting completely to their optimal level of tax avoidance. We generally find growth firms exhibit slower adjustment speeds and provide limited evidence that both multinational firms and income‐mobile firms exhibit faster adjustment speeds.

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“…Several studies examining capital market implications of tax rate volatility indicate that investors discount tax savings coupled with high tax rate volatility (Drake et al, 2019;Hutchens et al, 2019;Sikes & Verrecchia, 2016). In a similar vein, Saavedra (2018) finds that firms with more volatile cash ETRs bear higher loan spreads. Bratten et al (2017) document that volatile tax rates elicit information asymmetry in the form of decreased (increased) accuracy (dispersion) of analyst forecasts of after-tax earnings.…”

Section: Tax Outcome Volatilitymentioning

confidence: 92%

“…Consequently, volatile cash ETRs amplify capital providers' concern about tax aggressiveness given the uncertainty surrounding after-tax cash flows (Drake et al, 2019;Guenther et al, 2017;McGuire et al, 2013). In line with this notion, prior research highlights that investors and lenders penalize firms with volatile cash ETRs by increasing the costs of capital and decreasing firm valuation (Jacob & Schütt, 2020;Saavedra, 2018). While tax-reducing activities with uncertain outcomes help to alleviate financial constraints in the current period, they could increase a firm's refinancing risk, and thus the likelihood of financial distress in the future.…”

Section: Hypothesesmentioning

confidence: 94%

“…Interest in the volatility dimension of corporate tax planning has accelerated in recent years (Drake et al., 2019; Delis, Hasan, & Karavitis, 2020; Guenther, Matsunaga, & Williams, 2017; Neuman, 2019). Providing evidence on the determinants of tax rate volatility is critical because recent studies find that firms with volatile tax rates face significant consequences, such as higher costs of capital (Saavedra, 2018), lower firm valuation (Jacob & Schütt, 2020), more information asymmetry (Bratten, Gleason, Larocque, & Mills, 2017), less value relevant after‐tax earnings and cash flows (Drake et al., 2019), and higher audit fees (Abernathy, Finley, Rapley, & Stekelberg, 2019). Despite the heated discussion about the association between non‐tax costs and volatile tax outcomes, little evidence is available about why some firms exhibit substantially more volatile tax rates than others (Wilde & Wilson, 2018).…”

Section: Introductionmentioning

confidence: 99%

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Financial constraints and future tax outcome volatility

Akamah

Omer

Shu

2020

Business Fin & Account

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We investigate whether variation in the volatility of tax outcomes across firms is associated with the extent of financial constraints. We document a positive association between current-period financial constraints and the volatility of cash effective tax rates in subsequent periods. We find that this positive association becomes more pronounced as firms avoid more cash taxes. These results suggest that as financial constraints increase, the benefits of cash tax savings more likely outweigh the costs associated with more volatile tax outcomes. Recent research documents a negative association between financial constraints and the level of cash taxes paid. Our evidence suggests that tax strategies adopted by more financially constrained firms to increase cash tax savings come at the price of more volatile future tax rates.

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Is Tax Volatility Priced by Lenders in the Syndicated Loan Market?

Cited by 38 publications

References 27 publications

Assessing Tax Risk: Practitioner Perspectives

Assessing Tax Risk: Practitioner Perspectives

How Quickly Do Firms Adjust to Optimal Levels of Tax Avoidance?

Financial constraints and future tax outcome volatility

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