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

79 Pages Posted: 12 Jun 2020 Last revised: 29 Jun 2022

See all articles by Rebecca De Simone

Rebecca De Simone

London Business School - Department of Finance

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

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 )

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