AAA Spark Meeting of Regions

Cash Flows from Tax Planning and Credit Ratings

• In Event: Taxation, Creditors, and Owners

Abstract

Cash flows from tax planning (CFTP) are a rich source of liquidity for firms. Following prior literature and anecdotal evidence, it is unclear whether CFTP have the same effect on credit rating outcomes as pre-tax operating cash flows. We provide consistent evidence that CFTP are more strongly associated with credit rating changes than pre-tax cash flows, suggesting that CFTP positively affects perceived credit risk. While existing studies show that higher levels of tax planning are associated with higher interest rates, we find that the associated reduction in principal from excess CFTP frequently results in an overall lower borrowing cost. We are among the first to examine whether CFTP affect credit ratings and the first to provide evidence that CFTP result in lower, not higher, overall borrowing costs.

Authors

• Samuel B Bonsall, The Pennsylvania State University

• Nathan Chad Goldman, North Carolina State University

• Russ Hamilton, Southern Methodist University