Does IRS Monitoring Matter for the Cost of Bank Loans?

58 Pages Posted: 15 Jul 2019 Last revised: 1 Jul 2021

See all articles by Theodora Bermpei

Theodora Bermpei

University of Sussex - School of Business, Management and Economics

Antonios Nikolaos Kalyvas

Department of Banking and Finance, Southampton Business School, University of Southampton

Simon Wolfe

University of Southampton - Southampton Business School

Date Written: July 8, 2019

Abstract

Using data on syndicated bank loans, we find that higher IRS audit probabilities exert a negative and significant effect on the cost of bank credit. A one standard deviation increase in the IRS audit probability decreases the cost of bank loans by around 9 basis points (or $1.55 million interest for the average loan). We also show that this negative association is more pronounced for loans granted to borrowers with stronger lending relationships, especially if they have credible access to the equity and public debt markets. These results indicate that IRS monitoring could increase the bargaining power of borrowers that have access to public sources of external financing and restrain private lenders from extracting informational rents from their lending relationships. These findings provide a novel insight into how IRS monitoring could lower the cost of corporate financing through the banking system. This study informs the public policy debate about the IRS by showing that it exerts a significant positive spillover to the US economy.

Keywords: syndicated loans, loan pricing, tax enforcement, IRS, information asymmetry

JEL Classification: G21, H25, H26

Suggested Citation

Bermpei, Theodora and Kalyvas, Antonios Nikolaos and Wolfe, Simon, Does IRS Monitoring Matter for the Cost of Bank Loans? (July 8, 2019). Available at SSRN: https://ssrn.com/abstract=3419334 or http://dx.doi.org/10.2139/ssrn.3419334

Theodora Bermpei (Contact Author)

University of Sussex - School of Business, Management and Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

Antonios Nikolaos Kalyvas

Department of Banking and Finance, Southampton Business School, University of Southampton ( email )

Southampton, SO17 1BJ
United Kingdom

Simon Wolfe

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

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