Abstract
A longstanding question is why an important fraction of public companies pay relatively large amounts in taxes, apparently forgoing the benefits of tax avoidance. This study finds that firms with high effective tax rates are, to some extent, unsuccessful tax avoiders. These firms engage in tax avoidance activities but later return part of their tax savings to tax authorities. Moreover, lenders penalize these firms with higher loan spreads and more restrictive contract terms. This effect is economically important and represents a cost of engaging in tax avoidance activities. Overall, this study contributes to our understanding of corporate tax behavior by presenting the first study that analyzes unsuccessful tax avoiders.
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