We find that, contrary to prior findings, tax avoidance has a non-linear relationship with cost of debt. Debtholders reward increasing tax avoidance with decreasing bond yields for “undersheltering” firms until reaching a minimum yield. Beyond that minimum yield, as tax avoidance increases, debtholders penalize firms with increasing costs of debt. We use secondary bond market as our empirical setting as the yields are not affected by market timing at issuance. We test several models to conclude that a quadratic function best captures the relation between tax avoidance and cost of debt. Our findings are robust to various specifications of the effective tax rate measure, to the exclusion of large firms, and in both investment grade and speculative grade subsamples.

中文翻译：

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避税与公共债务成本的抛物线关系


我们发现，与以前的研究结果相反，避税与债务成本呈非线性关系。债务持有人通过降低“庇护不足”公司的债券收益率来奖励越来越多的避税行为，直到达到最低收益率。超过该最低收益率，随着避税行为的增加，债务持有人会以不断增加的债务成本对公司进行惩罚。我们使用二级债券市场作为我们的实证设置，因为收益率不受发行时市场时机的影响。我们测试了几个模型，得出结论，二次函数最能捕捉避税与债务成本之间的关系。我们的研究结果对有效税率衡量标准的各种规范（不包括大公司）以及投资级和投机级子样本都是稳健的。