Banks' Equity Stakes and Lending: Evidence from a Tax Reform
49 Pages Posted: 17 Nov 2016 Last revised: 2 Dec 2016
Date Written: October, 2016
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.
JEL Classification: G21, G32
Suggested Citation: Suggested Citation