Rollover Risk and Tax Avoidance

Abstract

This study examines the association between rollover risk and tax avoidance. Rollover risk, also referred to as refinancing risk, is the risk that firms are not able to obtain new debt to refinance their existing debt. On the one hand, firms may avoid taxes to generate cash internally. On the other hand, tax avoidance can increase the cost of debt. Our findings suggest that, in general, a positive relationship exists between rollover risk and tax avoidance. In cross-sectional analyses, we find that the positive association between rollover risk and tax avoidance is more (less) pronounced for firms with financial constraints (alternative financing sources). Additional analyses reveal that this positive association is attenuated when the market interest rates are higher. Furthermore, financially constrained firms operating in a higher market interest rates environment exhibit a further reduction in the positive association between rollover risk and tax avoidance. Finally, we find that firms engage in tax avoidance in anticipation of debt maturing in the following year. The findings are informative to shareholders and policy makers who have an interest in shaping firms’ tax avoidance activities.