Tax avoidance and debt maturity in SMEs

Abstract

We investigate how tax avoidance affects the maturity structure of debt in firms where tax avoidance costs are presumably low, namely SMEs. Previous research has shown that creditors of listed tax-avoiding companies impose shorter maturities to more frequently reassess the tax avoidance risks in debt contracts. Using a sample of 110,690 firm-year observations of Spanish SMEs over the period 2007–2020, we examine the relationship between tax avoidance and debt maturity and the channels driving this relationship. We find that tax-avoiding SMEs show a longer debt maturity. This effect is stronger for SMEs with higher profitability, lower earnings management incentives, and higher reliability of financial reporting. We also find that tax avoidance reduces leverage and short-term debt, increases future cash flows, and decreases future cash flow volatility. Overall, these findings suggest that, unlike large firms, SMEs use cash tax savings to reduce leverage and short-term debt in their financial structure and that tax avoidance is positively valued by their lenders.