Does IRS Monitoring Matter for the Cost of Bank Loans?

Abstract

Using data on syndicated bank loans, we find that higher IRS audit probabilities exert a negative and significant effect on the cost of bank credit. A one standard deviation increase in the IRS audit probability decreases the cost of bank loans by around 9 basis points (or $1.55 million interest for the average loan). We also show that this negative association is more pronounced for loans granted to borrowers with stronger lending relationships, especially if they have credible access to the equity and public debt markets. These results indicate that IRS monitoring could increase the bargaining power of borrowers that have access to public sources of external financing and restrain private lenders from extracting informational rents from their lending relationships. These findings provide a novel insight into how IRS monitoring could lower the cost of corporate financing through the banking system. This study informs the public policy debate about the IRS by showing that it exerts a significant positive spillover to the US economy.

Keywords: syndicated loans, loan pricing, tax enforcement, IRS, information asymmetry

JEL Classification: G21, H25, H26