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

49 Pages Posted: 17 Nov 2016

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: 2016-10

Abstract

Several papers 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, 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. Thus, our findings suggest that the prior evidence cannot be interpreted causally and that banks' equity stakes are immaterial for their lending.

Keywords: Relationship banking, Ownership, Monitoring

JEL Classification: G21, G32

Suggested Citation

von Beschwitz, Bastian and Foos, Daniel, Banks' Equity Stakes and Lending: Evidence from a Tax Reform (2016-10). FRB International Finance Discussion Paper No. 1183, Available at SSRN: https://ssrn.com/abstract=2870321 or http://dx.doi.org/10.17016/IFDP.2016.1183

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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