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Tax Risk and Cost of Debt: The Role of Tax Avoidance—Evidence from the Iraqi Stock Market

Author

Listed:
  • Hussen Amran Naji Al-Refiay

    (Department of Accounting, Administrations & Economics, University of Kerbala, Kerbala 964335027, Iraq)

  • Jasim Idan Barrak

    (Department of Accounting, Administrations & Economics, University of Kerbala, Kerbala 964335027, Iraq)

  • Asif Isam Elaibi Al-Tameemi

    (Department of Economics and Administrative Sciences, Imamreza University, Mashhad 9138833186, Iran)

  • Mohammadreza Pazhohi

    (Department of Economics and Administrative Sciences, University of Shiraz, Shiraz 7194684471, Iran)

Abstract

Taxes represent a significant expense for many companies, prompting a strong incentive to minimize tax liabilities through strategies known as tax avoidance. This research explores the impact of tax avoidance and tax risk disclosure on the cost of debt among companies listed on the Iraqi Stock Exchange. This study analyzes data from 33 firms from 2016 to 2021, employing multivariate linear regression and the generalized least squares (GLS) model to test the hypotheses. The findings indicate that tax avoidance significantly and positively affects the cost of debt, suggesting that firms engaging in tax avoidance may experience greater borrowing costs. Additionally, tax risk disclosure is shown to directly and significantly influence the cost of debt. Importantly, this study reveals that tax risk disclosure negatively moderates the relationship between accrual tax avoidance and the cost of debt, indicating that higher tax risk disclosure can reduce uncertainties associated with tax avoidance, reducing borrowing costs. These results imply that tax avoidance and its influence on corporate debt levels can affect the overall risk profile of a country's financial system. Understanding this relationship is crucial for governance measures aimed at managing tax risks effectively. Given the limited research in this area, this study contributes to the literature by examining how tax risk and tax avoidance relate to the cost of debt in an emerging market context.

Suggested Citation

  • Hussen Amran Naji Al-Refiay & Jasim Idan Barrak & Asif Isam Elaibi Al-Tameemi & Mohammadreza Pazhohi, 2025. "Tax Risk and Cost of Debt: The Role of Tax Avoidance—Evidence from the Iraqi Stock Market," Risks, MDPI, vol. 13(2), pages 1-24, February.
    • Handle: RePEc:gam:jrisks:v:13:y:2025:i:2:p:29-:d:1585929
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    References listed on IDEAS

    as
    1. Farzana Akbari & Mahdi Salehi & Mohammad Ali Bagherpour Vlashani, 2018. "The effect of managerial ability on tax avoidance by classical and Bayesian econometrics in multilevel models," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 13(6), pages 1656-1678, November.
    2. Saad Faysal & Mahdi Salehi & Mahdi Moradi, 2020. "The impact of ownership structure on the cost of equity in emerging markets," Management Research Review, Emerald Group Publishing Limited, vol. 43(10), pages 1221-1239, April.
    3. Mostafa Monzur Hasan & Ahsan Habib, 2024. "Corporate tax avoidance and trade credit," Accounting and Business Research, Taylor & Francis Journals, vol. 54(6), pages 700-729, September.
    4. Saad Faysal & Mahdi Salehi & Mahdi Moradi, 2020. "The impact of ownership structure on the cost of equity in emerging markets," Management Research Review, Emerald Group Publishing Limited, vol. 43(10), pages 1221-1239, April.
    Full references (including those not matched with items on IDEAS)

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