Banks' Equity Stakes and Lending: Evidence from a Tax Reform

Posted: 16 Aug 2013 Last revised: 24 Feb 2019

See all articles by Bastian von Beschwitz

Bastian von Beschwitz

Board of Governors of the Federal Reserve System

Daniel Foos

Deutsche Bundesbank

Multiple version iconThere are 3 versions of this paper

Date Written: September 13, 2018

Abstract

We study how a bank's equity stake in a borrowing firm affects lending to that firm. Similar to prior papers, we find a positive association between a bank's equity stake in a borrowing firm and lending to that firm. While such a positive cross-sectional correlation may be due to equity stakes benefiting lending, it may also be driven by endogeneity. To distinguish the two explanations, we study a German tax reform that permitted banks to sell their equity stakes tax-free. After the reform, many banks sold their equity stakes, but did not reduce lending to the firms. This observation is robust to several alternative model specifications, control groups, and time windows. Our findings suggest that banks’ equity stakes may be less important for lending than previously thought.

Keywords: Relationship banking; Ownership; Monitoring

JEL Classification: G21

Suggested Citation

von Beschwitz, Bastian and Foos, Daniel, Banks' Equity Stakes and Lending: Evidence from a Tax Reform (September 13, 2018). Journal of Banking and Finance, Vol. 96, 2018, Available at SSRN: https://ssrn.com/abstract=2310570 or http://dx.doi.org/10.2139/ssrn.2310570

Bastian Von Beschwitz (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Daniel Foos

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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