Investigating tax risk’s influence on tax avoidance and debt costs: evidence from France

Abstract

Purpose This paper aims to examine the impact of tax avoidance on the cost of debt. It also investigates the effect of tax risk on the relationship between tax avoidance and the cost of debt. Design/methodology/approach Two hypotheses are tested on a sample of nonfinancial French firms listed in the société des Bources Françaises 120 index from 2010 to 2022 using the feasible generalized least squares. To ensure the robustness of the findings, the authors changed the measures of tax avoidance and tax risk and used instrumental variable regression to effectively address concerns related to endogeneity. Additional analysis is conducted to examine if the relationship between tax avoidance and the cost of debt varies based on the magnitude of tax risk. Findings The authors found that tax avoidance negatively affects the cost of debt. However, when tax avoidance is associated with a high risk, it impacts positively the cost of debt. Practical implications This study’s findings are relevant to firms, creditors and French lawmakers. Creditors must make their decision to grant credit based simultaneously on proxies of tax avoidance and tax risk. Managers must effectively manage tax risks to protect their financial decisions, urging French policymakers to implement new regulations on corporate tax risk management. Originality/value To the best of the authors’ knowledge, this study is the first to have investigated the joint impact of tax avoidance and tax risk on the cost of debt in the French context.