Financial and Real Effects of Government Monitoring: Evidence From Commercial Bank Loans

45 Pages Posted: 12 Jun 2020 Last revised: 14 Oct 2020

See all articles by Rebecca De Simone

Rebecca De Simone

London Business School - Department of Finance

Date Written: May 18, 2020

Abstract

I use a 2009 redesign of the Ecuadorian government's corporate tax auditing to document that tax enforcement affects firms' cost of capital and real decisions in settings where agency frictions constrain lending. Firms included in a group that was disproportionately monitored, i.e., audited annually by the Ecuadorian tax authority, accessed significantly cheaper new bank debt despite paying more taxes. Additionally, monitored firms increased their investments in human and physical capital. I use a regression discontinuity design to control for selection bias in their decision about which firms to monitor. Finally, I provide evidence that tax enforcement reduces agency frictions between the firm and its lenders, which is reflected in the lower interest rate on new debt. The implications are that (1) credible tax enforcement by the government can play a corporate governance role, and, (2) tax enforcement is an effective and fiscally positive way to stimulate firm investment where agency frictions constrain lending.

Keywords: Monitoring, Real Effects, Credit Supply, Banking, Small Firms, Emerging Market, Large Taxpayer Unit, Corporate Governance

JEL Classification: E22, E24, E26, G21, G38

Suggested Citation

De Simone, Rebecca, Financial and Real Effects of Government Monitoring: Evidence From Commercial Bank Loans (May 18, 2020). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3587036 or http://dx.doi.org/10.2139/ssrn.3587036

Rebecca De Simone (Contact Author)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
116
Abstract Views
522
rank
294,426
PlumX Metrics