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
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: Suggested Citation