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Tax Avoidance and the Allocation of Credit

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  • Anna Meyendorff

Abstract

This paper models the credit-seeking behavior of a firm when applying for a bank loan increases the probability of being monitored by the fiscal authorities. Using Russia as an example of an economy with poorly enforced tax payment, I find that if the probability of paying taxes increases as a result of applying for a bank loan, profit maximizing firms will be less likely to borrow at a given rate of interest. In addition, firms with less risky projects will be more likely to drop out of the borrower pool. Finally, the more profitable a firm has been in the past, as measured by the return to its existing investments, the less likely it will be to borrow from a bank to finance a new investment project. In an economy where alternative forms of external capital are few, this disincentive to borrow has significant consequences for the overall level and quality of investment in the economy

Suggested Citation

  • Anna Meyendorff, 1998. "Tax Avoidance and the Allocation of Credit," William Davidson Institute Working Papers Series 150, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1998-150
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/39539/3/wp150.pdf
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    Cited by:

    1. Simon Johnson & John McMillan & Christopher Woodruff, 2002. "Property Rights and Finance," American Economic Review, American Economic Association, vol. 92(5), pages 1335-1356, December.
    2. Simon Johnson & John McMillan & Christopher Woodruff, 1999. "Property Rights, Finance, and Entrepreneurship," CESifo Working Paper Series 212, CESifo Group Munich.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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