Investigating tax risk’s influence on tax avoidance and debt costs: evidence from France
| Date | 20 June 2024 |
| Pages | 321-336 |
| DOI | https://doi.org/10.1108/JFC-03-2024-0111 |
| Published date | 20 June 2024 |
| Author | Mouna Guedrib,Zeineb Hamdi |
Investigating tax risk’sinfluence
on tax avoidance and debt costs:
evidence from France
Mouna Guedrib
Department of Accounting and Law, Faculty of Economics and Management,
University of Sfax, Sfax, Tunisia, and
Zeineb Hamdi
Faculty of Economics and Management, University of Sfax, Sfax, Tunisia
Abstract
Purpose –This paper aims to examine the impactof tax avoidance on the cost of debt. It also investigates
the effectof tax risk on the relationship between tax avoidanceand the cost of debt.
Design/methodology/approach –Two hypothesesare tested on a sample of nonfinancial French firms
listed in the société des Bources Françaises 120 index from2010 to 2022 using the feasible generalized least
squares. To ensurethe robustnessof the findings, theauthors changed the measures of tax avoidanceand tax
risk and used instrumental variable regression to effectively address concerns related to endogeneity.
Additional analysis is conducted to examineif the relationship between tax avoidance and the cost of debt
varies basedon the magnitude of tax risk.
Findings –The authors found that tax avoidancenegatively affects the cost of debt. However, when tax
avoidanceis associated with a high risk, it impacts positively the cost of debt.
Practical implications –This study’sfindings are relevant to firms, creditors and French lawmakers.
Creditors must make theirdecision to grant credit based simultaneously on proxiesof tax avoidance and tax
risk. Managers must effectively manage tax risks to protect their financial decisions, urging French
policymakersto implement new regulations on corporate tax risk management.
Originality/value –To the best of the authors’knowledge, thisstudy is the first to have investigated the
joint impactof tax avoidanceand tax risk on the cost of debt in the French context.
Keywords Tax avoidance, Tax risk, Cost of debt, SBF 120
Paper type Research paper
1. Introduction
Tax avoidance refers to the strategiesused by firms to minimize their tax liabilities,ranging
from legitimate tax planning to more aggressive approaches (Hanlon and Heitzman, 2010).
While tax avoidance can result in tax savings, it also entails variouscosts, including agency
costs, implementation costsand outcomes costs. The relationship between high levels of tax
planning and tax risk remains ambiguous (Wilde and Wilson, 2018). Consequently, recent
studies in the field of taxation have focused on different proxies to measure tax avoidance
and tax risk, aiming to examine their joint impact on firm value (Drake et al.,2019;Guedrib
and Marouani, 2023)orfirm risk (Guedrib and Bougacha, 2024).
Traditionally, researchon tax avoidance has primarily considered its implicationsfrom a
shareholder perspective or in the context of the shareholdermanager agency relationship.
However, the study of tax avoidance from the perspective of the managercreditor
relationship reveals a different dynamic. Unlike shareholders, creditors have a fixed claim
Tax avoidance
and debt costs
321
Journalof Financial Crime
Vol.32 No. 2, 2025
pp. 321-336
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-03-2024-0111
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
and bear the risk associated with firms’tax avoidance activities (Kovermann, 2018).
Consequently, tax avoidance activitiesmay increase the cost of debt. This first explanation
is known as the “risk exposure effect”(Hasan et al., 2014;Medhioub and Boujelbene, 2024).
On the other hand, tax avoidance can lead to tax savings, enabling firms to allocate cash
savings toward debt repayment. Hasan et al. (2014)posit that “if banks perceive avoidance-
induced risks as more salient than the concomitantbenefits, one would expect to observe an
overall positiverelation between tax avoidance and bank loan cost”(p.2).
Empirically, the association betweentax avoidance and the cost of debt has been the subject
of several studies (Lim, 2011;Hasan et al., 2014;Beladi et al., 2018;Medhioub and Boujelbene,
2024;S
anchez-Ballesta and Yagüe, 2023), yielding mixed results. However, these studies often
fail to quantify the risk associated with tax avoidance and do not examine the impact of risky
tax avoidance on the cost of debt. The tax avoidance measures used in these studies do not
necessarily capture the risk component (e.g. book -tax differences, cash-effective tax rate [ETR],
ETR, etc.). Consequently, researchers emphasize the need to investigate the joint effect of tax
avoidance and tax risk, given the close relationship between these concepts, and to use different
proxies for these two constructs (Drake et al., 2019;Guedrib and Marouani, 2023;Guedrib and
Bougacha, 2024). Only one study to date has explored the joint impact of tax avoidance and tax
risk on the cost of debt. Kovermann (2018) found that the effect of tax avoidance on the cost of
debt depends on the level of tax risk.
This paper investigates thecombined impact of tax avoidance and tax risk on debt costs
specifically in the French context. France and Germany share similarities as civil law
countries with developedeconomies and bank-dominated financial systems (Demirguc-Kunt
and Levine, 2016). While both offer substantial creditor protection, Germany has stronger
creditor rights (Deakin et al.,2017). Kovermann (2018) highlights Germany’s stringent
bankruptcy laws and robust creditorrights, which expose creditors to less risk arising from
corporate actions such as tax avoidance compared to systems with weaker creditor rights.
However, Germany has a lower corporate tax rate (15% since 2008) compared to France,
which had the second-highest statutory rate (34.43%) in 2017 in the Organisation for
Economic Co-operation and Development (OECD) (Bach et al., 2019). Consequently, this
study aims to determine if tax avoidance and tax risk affect debt costs similarly in both
French and Germansettings.
This paper investigates the influence of tax avoidance and tax risk on the cost of debt
using a sample of French nonfinancial firms listed in the société des Bources Françaises (SBF)
120 index from 2010 to 2022, using the feasible generalized least squares (FGLS) method. The
results reveal that tax avoidance has a negative impact on the cost of debt, confirming the
cash-saving effect associated with tax avoidance. However, when tax avoidance is
accompanied by high risk, it leads to an increase in the cost of debt. Therefore, creditors must
consider both tax avoidance and tax risk proxies when making credit decisions.
This study contributessignificantly to the existing literature on taxation in several ways.
First, it highlights the importance of incorporating tax risk into models examining the
effects of tax avoidance, providing a more comprehensive understanding of the
consequences of these practices.Second, it is the first study, to the best of our knowledge, to
explore the interactiveimpact of tax avoidance and tax risk on the cost of debt in the French
context. Lastly, it emphasizes the significance of considering tax strategy risks in the
decision-makingprocess of creditors, particularly in a financial system dominatedby banks.
The paper proceeds as follows:Section 2 provides a comprehensive literature review and
develops hypotheses. Section 3 outlines the research methodology. Empirical findings are
discussed in Section 4. The robustness of the results and additionalanalyses are presented
in Section 5. Finally,the conclusion is presented in the last section.
JFC
32,2
322
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