Download This PaperFinancial and Real Effects of Government Monitoring: Evidence from Commercial Bank Loans
79 Pages Posted: 12 Jun 2020 Last revised: 29 Jun 2022
Date Written: May 18, 2020
Abstract
I use an Ecuadorian reform to show that firm monitoring by tax authorities increases firm transparency, improves firm financial access, and impacts employment and investment. Using a regression discontinuity design I find that borrowing costs decrease 18.9 while borrowing increases 23.1 for highly-scrutinized firms. Moreover, treated firms report approximately 20 higher investment and employment. The effect is strongest for the firms with a higher evasion risk and where private contracts are costlier to enforce, indicating that the effect of tax monitoring works primarily through reducing fraudulent financial statements and firm cash flow diversion.
Keywords: Government Regulation; Corporate Governance; Public Economics Externalities; Real Effects; Banking; Small Firms; Emerging Markets; Large Taxpayer Unit; Formalization; Auditing
JEL Classification: 38,G21,H23,H26,O16
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