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Transparency, Tax Pressure and Access to Finance

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: 04 Feb 2015
Publication status: Forthcoming in Review of Finance
Handle: RePEc:sef:csefwp:310
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  1. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2008. "Formal versus informal finance : evidence from China," Policy Research Working Paper Series 4465, The World Bank.
  2. Simeon Djankov & Tim Ganser & Caralee McLiesh & Rita Ramalho & Andrei Shleifer, 2010. "The Effect of Corporate Taxes on Investment and Entrepreneurship," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 31-64, July.
  3. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, vol. 78(2), pages 299-321, December.
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  6. Khurana, Inder K. & Pereira, Raynolde & Martin, Xiumin, 2006. "Firm Growth and Disclosure: An Empirical Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(02), pages 357-380, June.
  7. Ellul, Andrew & Pagano, Marco & Panunzi, Fausto, 2008. "Inheritance Law and Investment in Family Firms," CEPR Discussion Papers 6977, C.E.P.R. Discussion Papers.
  8. Marco Pagano & Fabio Panetta & Luigi Zingales, 1995. "Why Do Companies Go Public? An Empirical Analysis," NBER Working Papers 5367, National Bureau of Economic Research, Inc.
  9. Lang, Mark & Lins, Karl V. & Maffett, Mark, 2009. "Transparency, Liquidity, and Valuation: International Evidence," Working Papers 09-3, University of Pennsylvania, Wharton School, Weiss Center.
  10. Desai, Mihir A. & Dharmapala, Dhammika, 2009. "Earnings Management, Corporate Tax Shelters, and Book–Tax Alignment," National Tax Journal, National Tax Association, vol. 62(1), pages 169-86, March.
  11. Michael Manove & A. Jorge Padilla & Marco Pagano, 1998. "Collateral vs. Project Screening: A Model of Lazy Banks," CSEF Working Papers 10, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  12. Kasanen, Eero & Kinnunen, Juha & Niskanen, Jyrki, 1996. "Dividend-based earnings management: Empirical evidence from Finland," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 283-312, October.
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