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The importance of IRS monitoring to debt pricing in private firms

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  • Guedhami, Omrane
  • Pittman, Jeffrey
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    Abstract

    We examine the link between Internal Revenue Service (IRS) monitoring and yield spreads on private firms' 144A bond issues. After controlling for security-specific and other firm-specific determinants, we provide evidence that debt financing is cheaper when the probability of a face-to-face IRS audit is higher. Consistent with another prediction, we find that IRS oversight has a stronger impact on bond pricing for private firms with high ownership concentration, which suffer worse agency problems between controlling shareholders and outside investors. Collectively, our research implies that IRS monitoring plays a valuable corporate governance role by reducing information asymmetry evident in borrowing costs.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 90 (2008)
    Issue (Month): 1 (October)
    Pages: 38-58

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    Handle: RePEc:eee:jfinec:v:90:y:2008:i:1:p:38-58

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Corporate governance Taxes Agency costs of debt Ownership structure;

    References

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    Cited by:
    1. Byun, Hae-Young & Hwang, Lee-Seok & Lee, Woo-Jong, 2011. "How does ownership concentration exacerbate information asymmetry among equity investors?," Pacific-Basin Finance Journal, Elsevier, vol. 19(5), pages 511-534, November.
    2. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    3. Hasan, Iftekhar & Hoi, Chun-Keung (Stan) & Wu, Qiang & Zhang, Hao, 2014. "Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans," Research Discussion Papers 3/2014, Bank of Finland.
    4. Hope, Ole-Kristian & Ma, Mark (Shuai) & Thomas, Wayne B., 2013. "Tax avoidance and geographic earnings disclosure," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 170-189.
    5. Andres, Christian & Betzer, André & Limbach, Peter, 2014. "Underwriter reputation and the quality of certification: Evidence from high-yield bonds," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 97-115.
    6. Ang, James & Mauck, Nathan, 2011. "Fire sale acquisitions: Myth vs. reality," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 532-543, March.
    7. Christian Andres & André Betzer & Peter Limbach, 2013. "Underwriter Reputation and the Quality of Certification: Evidence from High-Yield Bonds," Schumpeter Discussion Papers SDP13006, Universitätsbibliothek Wuppertal, University Library.
    8. Narjess Boubakri & Sadok El Ghoul & Omrane Guedhami & Anis Samet, . "The Effects of Analyst Forecast Properties on the Cost of Debt: International Evidence," Finance Working Papers 15-12/2013, School of Business Administration, American University of Sharjah.

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