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.
|Date of creation:||11 Apr 2012|
|Date of revision:||04 Feb 2015|
|Publication status:||Forthcoming in Review of Finance|
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