IRS Tax Enforcement and the Cost of Syndicated Loans in the United States

Abstract

We show that tax enforcement benefits US firms that borrow from banks. Using data on syndicated loans over the 1993-2017 period, we find that higher IRS audit probabilities exert a negative and significant effect on the cost of loans. The baseline estimates show that a one standard deviation increase in the IRS audit probability decreases the cost of bank credit by around 9 basis points (or $1.55 million interest for the average loan). In further analysis we find that the negative effect of IRS tax enforcement on the cost of syndicated loans is more evident when the presence of external monitors, other than the IRS, is weaker and for loans issued by lead banks that are less reputed and less experienced with borrowing firms and their sector or region. IRS tax enforcement decreases also the probability that loans will contain covenants. The results are robust to several tests that address endogeneity and other concerns. These findings indicate that banks perceive the IRS as a useful external monitoring mechanism that alleviates information asymmetry in the syndicated loan market. This study informs the public policy debate about the IRS by showing that it exerts a positive spillover to the US economy in the form of lower costs of corporate financing through the banking system.