How Do Financial Institutions React to a Tax Increase?

67 Pages Posted: 17 Feb 2014 Last revised: 11 Aug 2016

Date Written: August 2, 2016

Abstract

This paper empirically highlights the role and significance of taxes for the capital structure decisions of banks. Using a difference-in-differences methodology, I show that an increase in the local U.S. state corporate tax rate affects the banks' financing as well as their operating choices. Better-capitalized banks raise their long-term non-depository debt and thus benefit from an enlarged tax shield. Worse-capitalized banks instead reduce their lending because a higher tax rate increases the tax-adjusted cost of funding, which renders the marginal loan unprofitable.

Keywords: financial institution, capital structure, corporate income tax

JEL Classification: G21, G30, G32

Suggested Citation

Schandlbauer, Alexander, How Do Financial Institutions React to a Tax Increase? (August 2, 2016). Journal of Financial Intermediation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2397030 or http://dx.doi.org/10.2139/ssrn.2397030

Alexander Schandlbauer (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Odense, 5230
Denmark

HOME PAGE: http://sites.google.com/site/alexanderschandlbauer/

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