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Transparency, Tax Pressure and Access to Finance

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Abstract

In choosing transparency, firms must trade off the benefits from better access to finance against the cost of a greater tax burden. We study this trade-off in a model with distortionary taxes and endogenous rationing of external finance. The evidence from two different data sets, one formed only by listed firms and another mainly by unlisted firms, bears out the model’s predictions: First, transparency is negatively correlated with tax pressure, particularly in sectors where firms are less dependent on external finance. Second, financial development enhances the positive effect of transparency on investment, and encourages transparency by financially dependent firms. Finally, investment and access to finance are positively correlated with firms’ transparency, especially in firms that depend more on external finance, and are negatively correlated with tax pressure. JEL Classification: G31, G32, G38, H25, H26, M40.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 310.

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Date of creation: 11 Apr 2012
Date of revision: 19 Jul 2014
Handle: RePEc:sef:csefwp:310

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Keywords: transparency; tax pressure; investment; access to finance.;

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  1. Ellul, Andrew & Pagano, Marco & Panunzi, Fausto, 2008. "Inheritance Law and Investment in Family Firms," CEPR Discussion Papers 6977, C.E.P.R. Discussion Papers.
  2. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
  3. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2008. "Formal versus informal finance : evidence from China," Policy Research Working Paper Series 4465, The World Bank.
  4. Manove, M. & Padilla, A.J. & Pagano, M., 1998. "Collateral vs. Project Screening: a Model of Lazy Banks," Papers 9807, Centro de Estudios Monetarios Y Financieros-.
  5. Simeon Djankov & Tim Ganser & Caralee McLiesh & Rita Ramalho & Andrei Shleifer, 2008. "The Effect of Corporate Taxes on Investment and Entrepreneurship," NBER Working Papers 13756, National Bureau of Economic Research, Inc.
  6. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers 101, Edinburgh School of Economics, University of Edinburgh.
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Cited by:
  1. Capasso, Salvatore & Jappelli, Tullio, 2013. "Financial development and the underground economy," Journal of Development Economics, Elsevier, vol. 101(C), pages 167-178.

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