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Abstract:
Differences in interest margins reflect differences in bank characteristics, macroeconomic conditions, existing financial structure and taxation, regulation, and other institutional factors.

Using bank data for 80 countries for 1988-95, Demirguc-Kunt and Huizinga show that differences in interest margins and bank profitability reflect various determinants:

Bank characteristics.
Macroeconomic conditions.
Explicit and implicit bank taxes.
Regulation of deposit insurance.
General financial structure.
Several underlying legal and institutional indicators.

Controlling for differences in bank activity, leverage, and the macroeconomic environment, they find (among other things) that:

Banks in countries with a more competitive banking sector-where banking assets constitute a larger share of GDP-have smaller margins and are less profitable. The bank concentration ratio also affects bank profitability; larger banks tend to have higher margins.

Well-capitalized banks have higher net interest margins and are more profitable. This is consistent with the fact that banks with higher capital ratios have a lower cost of funding because of lower prospective bankruptcy costs.

Differences in a bank's activity mix affect spread and profitability. Banks with relatively high noninterest-earning assets are less profitable. Also, banks that rely largely on deposits for their funding are less profitable, as deposits require more branching and other expenses. Similarly, variations in overhead and other operating costs are reflected in variations in bank interest margins, as banks pass their operating costs (including the corporate tax burden) on to their depositors and lenders.

In developing countries foreign banks have greater margins and profits than domestic banks. In industrial countries, the opposite is true.

Macroeconomic factors also explain variation in interest margins. Inflation is associated with higher realized interest margins and greater profitability. Inflation brings higher costs-more transactions and generally more extensive branch networks-and also more income from bank float. Bank income increases more with inflation than bank costs do.

There is evidence that the corporate tax burden is fully passed on to bank customers in poor and rich countries alike.
Legal and institutional differences matter. Indicators of better contract enforcement, efficiency in the legal system, and lack of corruption are associated with lower realized interest margins and lower profitability.

This paper - a product of the Development Research Group - is part of a larger effort in the group to study bank efficiency.

bank profitability, taxation, financial structure

Abstract:
For countries with underdeveloped financial systems, a move toward a more developed financial system reduces bank margins and profitability. Controlling for both bank and market development, financial structure per se - the development of banks relative to that of markets-appears to have no independent effect on bank performance.

Countries differ in the extent to which their financial systems are bank-based or market-based. The financial systems of Germany and Japan, for example, are considered bank-based because banks play a leading role in mobilizing savings, allocating capital, overseeing investment decisions of corporate managers, and providing risk management vehicles. The systems of the United States and the United Kingdom are considered more market-based.

Using bank-level data for a large number of industrial and developing countries, Demirguc-Kunt and Huizinga present evidence about the impact of financial development and structure on bank performance. They measure the relative importance of bank or market finance by the relative size of stock aggregates, by relative trading or transaction volumes, and by indicators of relative efficiency.

They show that in developing countries both banks and stock markets are less developed, but financial systems tend to be more bank-based. The richer the country, the more active are all financial intermediaries.

The greater the development of a country's banks, the tougher is the competition, the greater is the efficiency, and the lower are the bank margins and profits.

The more underdeveloped the stock market, the greater are the bank profits. But financial structure per se does not have a significant, independent influence on bank margins and profits.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study financial structure and development. The study was funded by the Bank's Research Support Budget under the research project Financial Structure and Economic Development (RPO 682-41). The authors may be contacted at ademirguckunt@worldbank.org or h.p.huizinga@kub.nl.

Abstract:
Does the entry of foreign banks make domestic banks more competitive? This study shows that, in developing countries, increasing the number (even more than the share) of foreign banks reduces both profits and overhead expenses of domestic banks.

Banking markets are becoming increasingly international through financial liberalization and general economic integration.

Using bank-level data for 80 countries for 1988-95, Claessens, Demirguc-Kunt, and Huizinga examine the extent of foreign ownership in national banking markets. They compare net interest margins, overhead, taxes paid, and profitability of foreign and domestic banks.

The comparative functions of foreign banks and domestic banks is very different in developing and industrial countries, possibly because of a different customer base, different bank procedures, and different regulatory and tax regimes:
° In developing countries foreign banks tend to have greater profits, higher interest margins, and higher tax payments than do domestic banks.
° In industrial countries it is the domestic banks that have greater profits, higher interest margins, and higher tax payments.

It is common to read, in the literature on foreign banking, that the entry of foreign banks can make national banking markets more competitive, thereby forcing domestic banks to operate more efficiently. Claessens, Demirguc-Kunt, and Huizinga show that increasing the foreign share of bank ownership does indeed reduce profitability and overhead expenses in domestically owned banks - so the general effect of foreign bank entry may be positive.

Interestingly, the number of foreign entrants matters more than their market share, suggesting that they affect local bank competition more on entry rather than after gaining a substantial market share.

These effects hold even when controlling for the fact that foreign banks may be attracted to markets with certain characteristics, such as low banking costs.

This paper - a joint product of the East Asia and Pacific Region and the Development Research Group - is part of a larger effort in the Bank to study the effects of increasing global integration of financial services. The authors may be contacted at cclaessens @worldbank.org, ademirguckunt@worldbank.org, or H.P.Huizinga@Kub.NL.

Abstract:
This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding in contrast lowers the rate of return on assets, while it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, consistent with the demise of the U.S. investment banking sector.

non-interest income share, wholesale funding, diversification, universal banking, bank fragility, financial crisis

Abstract:
This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding in contrast lowers the rate of return on assets, while it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, consistent with the demise of the U.S. investment banking sector.

bank fragility, financial crisis, non-interest income share, universal banking, wholesale funding

Abstract:
This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding in contrast lowers the rate of return on assets, while it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, consistent with the demise of the U.S. investment banking sector.

non-interest income share, wholesale funding, diversification, universal banking, bank fragility, financial crisis

Abstract:
This paper presents evidence of banks using accounting discretion to overstate the value of distressed assets. In particular, we show that the stock market applies far greater discounts to a bank's real estate loans and mortgage-backed securities than are implicit in the book values of these assets, especially following the onset of the U.S. mortgage crisis. This suggests that bank balance sheets overvalue real estate related assets during economic slowdowns. Estimated discounts are smaller for distressed banks, as these banks derive relatively large benefits from the financial safety net to offset asset impairment. We also find that bank share prices, especially for banks with large exposures to mortgage-backed securities, react favorably to recent changes in accounting rules that relax fair value accounting. Banks with large exposures to mortgage-backed securities are also found to provision less for bad loans. Finally, we find that banks, and especially distressed banks, use discretion in the classification of mortgage-backed securities so as to inflate the book value of these securities. Our results provide several pieces of compelling evidence that banks' balance sheets offer a distorted view of the financial health of the banks, especially for banks with large exposures to real estate loans and mortgage-backed securities, and suggest that recent changes that relax fair value accounting may further distort this picture.

accounting standards, bank regulation, fair value accounting, financial crisis, mortgage-backed securities, real estate loans

Abstract:
This paper presents evidence of banks using accounting discretion to overstate the value of distressed assets. In particular, we show that the stock market applies far greater discounts to a bank’s real estate loans and mortgage-backed securities than are implicit in the book values of these assets, especially following the onset of the U.S. mortgage crisis. This suggests that bank balance sheets overvalue real estate related assets during economic slowdowns. Estimated discounts are smaller for distressed banks, as these banks derive relatively large benefits from the financial safety net to offset asset impairment. We also find that bank share prices, especially for banks with large exposures to mortgage-backed securities, react favorably to recent changes in accounting rules that relax fair value accounting. Banks with large exposures to mortgage-backed securities are also found to provision less for bad loans. Finally, we find that banks, and especially distressed banks, use discretion in the classification of mortgage-backed securities so as to inflate the book value of these securities. Our results provide several pieces of compelling evidence that banks’ balance sheets offer a distorted view of the financial health of the banks, especially for banks with large exposures to real estate loans and mortgage-backed securities, and suggest that recent changes that relax fair value accounting may further distort this picture.

bank regulation, accounting standards, fair value accounting, real estate loans, mortgage-backed securities, financial crisis

Abstract:
It is difficult to design and implement an effective safety net for banks, because overgenerous protection of banks may introduce a risk-enhancing moral hazard and destabilize the very system it is meant to protect. The safety net that policymakers design must provide the right mix of market and regulatory discipline - enough to protect depositors without unduly undermining market discipline on banks.

There has been little empirical work on the effectiveness of safety nets designed for banks, for lack of data on safety net design across countries. Demirgüç-Kunt and Huizinga examine cross-country data on bank-level interest expense and deposit growth for evidence of market discipline in individual countries. In addition, using cross-country information on deposit insurance systems, they investigate the impact of explicit deposit insurance (and its key features) on bank interest rates and market discipline.

They find that:
· Many countries retain some degree of market discipline, regardless of the type of safety net.
· The existence of explicit deposit insurance lowers banks' interest expenses and makes interest payments less sensitive to bank risk factors, especially bank liquidity.
· Higher explicit coverage, broader coverage, and the existence of an earmarked insurance fund increase required-deposit rates and reduce market discipline.
· Government provision of funds lowers deposit rates but also reduces market discipline.
· Private (especially joint) management of insurance schemes lowers deposit rates and improves market discipline.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study deposit insurance. The authors may be contacted at ademirguckunt@worldbank.org or h.p.huizinga@kub.nl.

Abstract:
An important question is whether the financial safety net reduces market discipline on bank risk taking. For countries with varying deposit insurance schemes, we find that deposit rates continue to reflect bank riskiness. Cross-country evidence suggests that explicit deposit insurance reduces required deposit interest rates at a cost of reduced market discipline. Internationally, deposit insurance schemes vary widely in their coverage, funding, and management. Hence, there are widely differing views on how deposit insurance should optimally be structured. To inform this debate, we use a newly constructed data set of deposit insurance design features to examine how different design features affect deposit interest rates and market discipline.

Abstract:
This paper provides an analysis of the proposal for introducing a minimum withholding tax on interest in the EU. We present a model with three countries: a typical EU country, an "inside" tax haven, and an "outside" tax haven. In the initial non-cooperative solution, the former two countries impose withholding taxes on interest. We investigate what happens to welfare in these countries if the "inside" tax haven is forced to raise its withholding tax. From the model we proceed to a broader evaluation of the minimum withholding tax proposal.

Abstract:
This paper presents a model of a multinational firm's optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm's indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter because multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that corporate debt policy indeed not only reflects domestic corporate tax rates but also differences in international tax systems. These findings contribute to our understanding of how corporate debt policy is set in an international context.

Debt, Tax rates, Tax policy, Capital, Economic models

Abstract:
This paper presents a model that relates a multinational firm's optimal debt policy to taxation and to non-tax factors such as the desire to prevent bankruptcy. The model yields the predictions that a multinational's indebtedness in a country depends on national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested with the aid of a broad European data set combining firm-level data and information on the international tax treatment of dividend and interest streams. Corporate debt policy indeed appears to reflect national corporate tax rates and international corporate tax rate differences but not non-resident dividend withholding taxes.

Corporate taxation, financial structure, debt shifting

Abstract:
This paper presents a model that relates a multinational firm's optimal debt policy to taxation and to non-tax factors such as the desire to prevent bankruptcy. The model yields the predictions that a multinational's indebtedness in a country depends on national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested with the aid of a broad European data set combining firm-level data and information on the international tax treatment of dividend and interest streams. Corporate debt policy indeed appears to reflect national corporate tax rates and international corporate tax rate differences but not nonresident dividend withholding taxes.

corporate taxation, financial structure, debt shifting

Abstract:
This paper considers a world of many symmetric countries where public goods in principle are financed by taxes on saving, investment and pure profits. In theory, countries could use all three taxes in combination. In practice, however, the tax instrument set may be restricted by, for instance, tax evasion of a particular kind or some international agreement. This paper compares welfare levels if countries set taxes noncooperatively across different tax instrument sets. We find that depending on the strength of preferences for public goods, tax evasion that renders either saving or investment taxes infeasible may be welfare improving, if firms are in part foreign-owned.

Abstract:
In this paper, a worker's productivity is assumed to depend on his own quality and on the average quality of other employed workers. In this setting, unemployment benefits that induce low quality workers to leave the labor force have important efficiency as well as equity implications. In addition to unemployment benefits, the authorities can use a proportional income tax and lump sum transfers. The desirability of tax and transfer policy is considered from the perspectives of a utilitarian social planner and of an electorate consisting of employed and unemployed workers. Employed workers may be in favor of unemployment benefits, even though they do not benefit directly. If unemployment benefits are financed by lump sum taxes, then relatively high unemployment benefits may be favored by a coalition of the unemployed and of high quality employed workers.

Abstract:
This paper shows that banks use accounting discretion to overstate the value of distressed assets. Banks' balance sheets overvalue real estate-related assets compared to the market value of these assets, especially during the U.S. mortgage crisis. Share prices of banks with large exposure to mortgage-backed securities also react favorably to recent changes in accounting rules that relax fair-value accounting, and these banks provision less for bad loans. Furthermore, distressed banks use discretion in the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks.

Accounting, Asset management, Asset prices, Bank accounting, Bank regulations, Banks, Financial crisis, Housing prices, Investment, Liquidity management, Real estate prices

Abstract:
Cross-border M&As can trigger a higher international taxation of the target's income. Non-resident dividend withholding taxes may be imposed by the target country, while additional corporate income taxation can be imposed by the acquiring country. This paper examines how these additional tax liabilities affect takeover premiums and thus the gains to target shareholders. Our evidence suggests that takeover premiums fully reflect non-resident dividend withholding taxes, while they reflect corporate income taxation by the acquiring country less than fully. The incidence of non-resident withholding taxation thus appears to be entirely on target shareholders. Hence, withholding taxes do not seem to serve the purpose of taxing foreign acquirers. This evidence is consistent with previous findings that the gains of M&As primarily accrue to target shareholders.

international taxation, takeover premiums

Abstract:
This paper examines the implications of bank activity and short-term funding strategies for bank risk and returns using an international sample of 1,334 banks in 101 countries leading up to the 2007 financial crisis. Expansion into non-interest income generating activities such as trading increases the rate of return on assets, and it may offer some risk diversification benefits at very low levels. Non-deposit, wholesale funding, by contrast, lowers the rate of return on assets, although it can offer some risk reduction at commonly observed low levels of non-deposit funding. A sizeable proportion of banks, however, attract most of their short-term funding in the form of non-deposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating non-interest income or attracting non-deposit funding are very risky, which is consistent with the demise of the U.S. investment banking sector.

Banks & Banking Reform, Debt Markets, Emerging Markets, Access to Finance

Abstract:
Using a large international firm-level data set, we estimate separate effects of host and parent country taxation on the location decisions of multinational firms. Both types of taxation are estimated to have a negative impact on the location of new foreign subsidiaries. In fact, the impact of parent country taxation is estimated to be relatively large, possibly reflecting its international discriminatory nature. For the cross-section of multinational firms, we find that parent firms tend to be located in countries with a relatively low taxation of foreign-source income. Overall, our results show that parent-country taxation - despite the general possibility of deferral of taxation until income repatriation - is instrumental in shaping the structure of multinational enterprise.

corporate taxation, dividend withholding taxation, location decisions

Abstract:
An investigation of the optimal boundary between public and private production.

Huizinga and Nielsen investigate the optimal boundary between the public and private production sectors. They use a model in which government and private production coexist - in which a range of production activities can be carried out by either the government or the private sector.
In effect, the government determines which activities to maintain within the public sector and which to privatize. In choosing the sectoral boundary, the government trades off the relative inefficiency of marginal government production against the private investment distortion created by tax policy.

In an open economy, the private investment decision is distorted by a source-based income tax. In a closed economy, the private investment decision is distorted by either a private investment tax or a savings tax. Either tax produces a wedge between the gross return on investment and the net-of-tax return received by savers. Because of this tax wedge, the private cost of capital exceeds the shadow cost of public capital.

Optimally, the government sector is shown to be too large in the sense that the government carries out some activities in which it has an efficiency disadvantage and the private sector has an efficiency advantage. And it invests more in those activities than the private sector would. Generally the size of the government sector is related positively to the investment tax wedge.

The level of investment taxes - and thus the size of the state production sector - may be affected by tax competition in the international economy. As international capital becomes more mobile, there seems to be more scope for international (investment) tax competition. As a result of tax competition, perhaps, corporate income tax rates have been on a downward trend in European countries. In Europe, the general lowering of corporate income tax rates has coincided with a trend toward privatizing government activities.

Huizinga and Nielsen focus on the relationship between capital income taxes and the size of the government production sector. Analogously, one could consider the relationship between labor income taxes and the size of the state sector. In that instance, the model predicts that a formerly state-owned enterprise, after privatization, reduces its payroll. Privatization also seems to lead to reduced employment levels.

These results hold in both open economy and closed economy versions of the model.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to understand private sector development.

Abstract:
One test of the efficacy of World Bank partial credit guarantees is whether they lower the interest rate and lengthen the effective maturity of the part of the credit not covered by the guarantee. Do they? Since 1994, the World Bank has provided partial credit guarantees to private financiers of several large infrastructure projects in developing countries. A major objective of the partial guarantee program is to leverage Bank resources so as to provide developing countries with better private credit terms. A real test of the efficacy of World Bank partial credit guarantees is whether they also lower the interest rate and lengthen the effective maturity of the part of the credit not covered by the World Bank guarantee. On the basis of deals closed so far, Huizinga finds no evidence that guarantees have affected nonguaranteed interest rates favorably, while the duration of the nonguaranteed credits remains relatively short. This paper - a product of the Development Research Group - is part of a larger effort in the group to evaluate the impact of World Bank guarantees.

Abstract:
Several industrialized countries impose withholding taxes on public interest accruing to nonresidents. This paper examines the international incidence of such withholding taxes by estimating to what extent these taxes raise the cost of government borrowing. It is found that the pretax interest rate is most sensitive to the tax withheld on Japanese investors. In particular, the gross-up is about half of this tax, which suggests that about half is returned to the investor in the form of foreign tax credits. The extent of the gross-up rises over the 1989-93 period, which indicates that in recent years foreign tax credits have been available to a lesser extent.

Abstract:
This Paper examines how international depositors respond to national deposit insurance policies. Countries with explicit deposit insurance are found to be relatively attractive to international non-bank depositors. Schemes characterized by co-insurance, a private administration, and a low deposit insurance premium appear to be particularly favoured by these depositors. The sensitivity of non-bank deposits to deposit insurance policies opens up the possibility of international regulatory competition in this area. The EU directive on deposit insurance imposes minimum standards on national deposit insurance policies. This directive, however, is silent on several important features of deposit insurance such as the level of the deposit insurance premium. Hence, it may not preclude regulatory competition in Europe.

Deposit insurance, international deposits

Abstract:
In an international merger or acquisition, the national residences of the acquirer and the target determine to what extent the newly created multinational firm is subject to international double taxation. This paper presents evidence that the parent-subsidiary structure of newly created multinational firms reflects the prospect of international double taxation. The number of acquiring firms at the national level similarly reflects international double taxation. The evidence suggests that tax policy in the form of lower tax rates or the elimination of residence-based worldwide taxation attracts additional parent companies of multinational firms. On the basis of our estimation, we simulate the impact of the elimination of worldwide taxation by the United States on parent firm selection.

International taxation, mergers and acquisitions

Abstract:
Both in theory and practice, capital controls and dual exchange rate systems can be part of a country's optimal tax policy. We first show how a dual exchange rate system can be interpreted as a tax (or subsidy) on international capital income. We show that a dual exchange rate system, with separate commercial and financial exchange rates, drives a wedge between the domestic and foreign returns on comparable assets. As a borrower, the government itself is a direct beneficiary. Secondly, based on data from South Africa, we present empirical evidence of this revenue implicit in a dual exchange rate system; a revenue that amounted to as much as 0.1 percent of GDP for the South African government. However, this paper also shows that both the capital controls and the dual exchange rate system in South Africa gave rise to many perverse unanticipated effects. The latter may render capital controls and dual exchange rate systems unattractive in the end and, thereby, provides a rationale for the recent trend in exchange rate liberalization and unification.

Dual exchange rate systems, capital controls, emerging markets, financial repression, optimal tax policy

Abstract:
A two-tiered exchange rate system can be interpreted as a set of separate taxes on money and other financial assets. If the official two-tiered exchange rate system coexists with a black market for foreign exchange, then there is implicit taxation of the international goods trade as well. This paper presents some evidence on the tax rates and tax revenues implicit in the exchange rate systems of The Bahamas (from 1978 to 1995), the Dominican Republic (from 1970 to 1984), and South Africa (from 1973 to 1995).

Abstract:
The EU deposit insurance directive requires member states to maintain deposit insurance with a minimum insured amount of 20,000 euros. This paper reviews the rationale for international coordination of deposit insurance policies. For international externalities of deposit insurance policies to exist, there has to be international ownership of either bank deposits or bank shares. On both counts, EU banking markets are currently highly integrated. The minimum coverage of 20,000 euros imposes costs if it forces some countries to 'overinsure' deposits. From a national perspective, the deposit insurance directive does not appear to result in overinsurance in the EU-15, but there may be overinsurance in several of the new member states.

Deposit insurance, international coordination

Abstract:
The major theme of this paper is that the commercial banks have weathered the debt crisis, while many debtor countries remain in economic paralysis or worse. There is a growing consensus that much of the LDC debt will not be fully serviced in the future, and that consensus is reflected in at least two ways: in the discounts observed in the secondary market prices for LDC debt, and in the discounts in the stock market pricing of banks with exposure in the LDCs.

Abstract:
This paper presents a simple model capturing differences between debt and equity finance to examine how financial structure matters for macroeconomic volatility. Debt finance is relatively cheap in the sense that debt holders need to verify relatively few profitability states, but debt finance may lead to costly bankruptcy. At the aggregate level, a more debt-based financial structure leads to a higher bankruptcy rate. Therefore, aggregate output is more variable in case of a heavy reliance on debt finance. This paper provides empirical evidence that countries with more equity finance have a lower variance of GDP and a lower probability of episodes of negative economic growth.

Bankruptcy costs, financial structure, macroeconomic volatility

Abstract:
Economic integration in Europe has not led to a 'race to the bottom' regarding corporate income taxes. This Paper documents trends in the foreign ownership of companies in Europe and examines whether foreign ownership has exerted a positive influence on corporate income tax levels. Using company-level data, we document that foreign ownership share in Europe stood at around 21.5% in the year 2000. The estimation suggests that a one percentage point increase in foreign ownership increases the average corporate income tax rate between 0.5-1%. Further international economic integration is likely to lead to higher foreign ownership shares with a concomitant positive influence on corporate taxation levels.

Foreign ownership, corporate taxation, tax competition

Abstract:
This Paper uses empirical proxies for the domestic development and international integration of debt and equity markets to assess the role of financial development in international consumption smoothing. First, we find that both domestic and international finance contribute to international consumption smoothing. Second, domestic debt market development is relatively important in explaining consumption smoothing relative to GNP among developed countries, while international debt market integration appears to be the limiting factor in developing countries. Third, both debt and equity market development contribute to the smoothing of consumption relative to GDP, with a somewhat larger role for the former than the latter. Finally, debt and equity market development reveal themselves to be substitutes in that more of one reduces the contribution of the other to consumption smoothing.

Consumption smoothing, financial development

Abstract:
High domestic shareholder concentration for publicly-traded firms is a common mechanism to mitigate minority shareholder expropriation in environments of poor investor protection. This offers an explanation of the home bias in share portfolios. An alternative mechanism, common in the case of non-traded firms, is to have a controlling foreign shareholder that may be subject to high international standards of investor protection. This Paper presents a model explaining a high foreign ownership share of non-traded equity in countries with poor investor protection. Empirical evidence supports the hypothesis that foreign ownership of non-traded equity is higher in countries with poor investor protection.

Foreign ownership, shareholder protection, non-traded equity

Abstract:
Previous empirical studies of secondary market discounts for developing countries have ignored important creditor country factors. The empirical evidence in this paper indicates that, after controlling for repayment indicators of borrower countries, bank exposure and capital are important determinants of secondary market discounts: an in crease in the exposure of large banks to a particular country leads to a decrease in the secondary market discounts on the debt of that country, while an increase in the capital of large banks leads to an increase in secondary market discounts. Among the repayment indicators of developing countries, only debt ratios are found to be significant determinants of the discounts. We suggest that the impacts of exposure and capital can be explained by the presence of deposit insurance. The evidence presented on the stock market pricing of lender banks supports this view.

Abstract:
The conduct of business activities in two or more countries creates opportunities for international profit shifting, while international tax rate differences create incentives. Using detailed information on both multinational firm structure and the international tax system, this paper examines the extent of intra-European profit shifting by European multinationals. Firm-level estimates of profit shifting can be aggregated to arrive at macro measures of international profit shifting. On average, we find a macro semi-elasticity of reported profits with respect to the top statutory tax rate of 1.43 in Europe, while shifting costs are estimated to be 1.6 percent of the tax base. International profit shifting leads to a substantial redistribution of national corporate tax revenues. Many European nations appear to gain revenues from intra-European profit shifting by multinationals largely at the expense of Germany.

Corporate taxation, international profit shifting

Abstract:
Using a large international firm-level data set, we estimate separate effects of host and parent country taxation on the location decisions of multinational firms. Both types of taxation are estimated to have a negative impact on the location of new foreign subsidiaries. In fact, the impact of parent country taxation is estimated to be relatively large, possibly reflecting its international discriminatory nature. For the cross-section of multinational firms, we find that parent firms tend to be located in countries with a relatively low taxation of foreign-source income. Overall, our results show that parent-country taxation - despite the general possibility of deferral of taxation until income repatriation - is instrumental in shaping the structure of multinational enterprise.

corporate taxation, dividend withholding taxation, location decisions

Abstract:
Cross-border M&As can trigger a higher international taxation of the target's income. Non-resident dividend withholding taxes may be imposed by the target country, while additional corporate income taxation can be imposed by the acquiring country. Our evidence suggests that takeover premiums fully reflect non-resident dividend withholding taxes, while there is some evidence that they reflect corporate income taxation by the acquiring country as well. In contrast, acquiring firm stock market returns around the bid announcement do not appear to reflect either type of taxation. These results are consistent with previous findings that the gains of M&As primarily accrue to target shareholders.

international taxation, takeover premiums

Abstract:
Both in theory and practice, capital controls and dual exchange rate systems can be part of a country's optimal tax policy. We first show how a dual exchange rate system can be interpreted as a tax (or subsidy) on international capital income. We show that a dual exchange rate system, with separate commercial and financial exchange rates, drives a wedge between the domestic and foreign returns on comparable assets. As a borrower, the government itself is a direct beneficiary. Secondly, based on data from South Africa, we present empirical evidence of this revenue implicit in a dual exchange rate system; a revenue that amounted to as much as 0.1 percent of GDP for the South African government. However, this paper also shows that both the capital controls and the dual exchange rate system in South Africa gave rise to many perverse unanticipated effects. The latter may render capital controls and dual exchange rate systems unattractive in the end and, thereby, provides a rationale for the recent trend in exchange rate liberalization and unification.

Capital controls, Dual exchange rate systems, financial repression

Abstract:
This paper considers the optimal frequency of central bank decision making. This frequency affects the central bank's flexibility to respond to economic shocks in a timely fashion and also its credibility to maintain low inflation. Generally, the central bank resets monetary policy less often than the arrival of economic news. By adjusting monetary policy less frequently, the central bank achieves lower inflation at the cost of somewhat higher output variability. Evidence for several key countries (Australia, Germany, Japan, the United Kingdom and the United States) shows that the frequency of actual monetary policy changes is indeed positively related to the inflation rate.

Abstract:
National budget deficits can create externalities through their effects on international interest rates. This paper examines the scope for fiscal rules restricting government borrowing for the case where government revenues (on the margin) stem from capital income taxation. There is no need to coordinate national borrowing, if governments have access to both a saving and an investment tax instrument. In the absence of a saving tax, however, national fiscal policies affect welfare abroad through the international interest rate. A reduction in first period deficits tied to increased government spending later is always welfare improving. Reducing first period deficits without further coordination of subsequent tax and spending policies will generally not improve welfare.

Abstract:
This paper considers capital movements between two countries with infinite horizons that differ in their rates of time preference. The paper investigates whether there exist regimes of taxing international lending that follow from national optimizing behavior and are consistent with positive consumption in the impatient country in steady state. Three types of taxation regime are considered: i) taxation by only the borrower country; ii) taxation by only the lender country; and iii) taxation by both countries. For all three cases, positive consumption in steady state by the impatient country is possible if the two countries differ sufficiently little in their rates of time preference.

Abstract:
Technical and other information may be a firm's most important asset. To benefit from its information, however, a firm has to reveal it to one or more employees. Better informed employees produce more, but at the same time they demand higher wages to prevent them from joining a business competitor or starting their own firm. This paper examines the strategic transfer of information by a firm to its employees over their employment lives. Generally, the firm is shown to transfer additional information to its employees each period of the employment relationship, while wages rise accordingly. An implication of the model is that more senior workers are more productive and receive higher wages because they have better access to the firm's vital information.