An Empirical Study of the Effect of Tax Inspections/Visits on Firm’s Credit Constraints in Developing Economies

Abstract

Using data largely consisting of SMEs from more than 130 countries, the study investigates the effect of government tax related inspections and/or visits on the probability of an SME being credit constrained. The results show that government tax inspections and/or visits are positively and significantly associated with an SME’s probability of being credit constrained. The results also show that when country variables are included, despite the differences among various groups, government tax inspections and/or visits increase the probability for firms to reply with severe or major financing obstacles. The study is significant not only to the literature of a firm’s credit constraint, but also to the literature of government-business relationships as well as to the literature of the strategic game between tax authorities and enterprise taxpayers. Hence, it is a study with important implications for policymakers, particularly in light of incoming hard times for businesses, SMEs in particular because of the pandemic.