Tax Risk and the Cost of Debt: The Role of Tax-Related Risk Disclosure

Abstract

This paper investigates the incremental effects of Form 10-K qualitative tax-related risk factor disclosures on the prices of syndicated loans. I find that firms with extensive tax-related risk factor disclosures enjoy lower loan spreads, controlling for the historical level of tax avoidance and tax risk. Further, I document that extensive tax-related risk disclosures attenuate the association between tax risk and the cost of debt. Overall, my findings are consistent with the premise that tax-related risk disclosures enhance management credibility and provide greater assurance to lenders. Thus managers can provide extensive tax-related risk disclosures to mitigate the debt premium associated with tax risk.