Regulation, Tax and Capital Structure: Evidence from Administrative Data on Italian Banks

62 Pages Posted: 15 Feb 2017

See all articles by Steve Bond

Steve Bond

University of Oxford

Kiung Yeon Han

University of Oxford

Giorgia Maffini

University of Oxford - Said Business School

Andrea Nobili

Associazione Bancaria Italiana

Giacomo Ricotti

Bank of Italy

Date Written: October 26, 2016

Abstract

This paper explores the effect of taxation on the capital structure of banks. For identification, we exploit exogenous regional variations in the rate of the Italian tax on productive activities (IRAP) using administrative, confidential data on regional banks provided by the Bank of Italy (1998-2011). We find that IRAP rate changes do not always lead to a change in banks’ leverage: banks close to the regulatory constraints do not change their leverage when tax rates change. This holds true for both tax cuts and tax hikes. Among less constrained entities, the leverage of smaller banks is more responsive to changes in tax rates than that of larger banks. Overall, the tax system has little effect on the capital structure of banks, especially for larger and possibly more systemically important institutions; regulatory constraints instead seem to be a first-order determinant. Our findings cast doubt on the role of the tax system as a cause or tool for addressing the negative externalities of excessive leverage in the banking system.

Keywords: capital structure, debt, regulation, corporate tax, banks

JEL Classification: G21, G32, G38, H25, H32

Suggested Citation

Bond, Steve and Yeon Han, Kiung and Maffini, Giorgia and Nobili, Andrea and Ricotti, Giacomo, Regulation, Tax and Capital Structure: Evidence from Administrative Data on Italian Banks (October 26, 2016). Bank of Italy Occasional Paper No. 361, Available at SSRN: https://ssrn.com/abstract=2917121 or http://dx.doi.org/10.2139/ssrn.2917121

Steve Bond

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Kiung Yeon Han

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Giorgia Maffini

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Andrea Nobili

Associazione Bancaria Italiana ( email )

Rome 00186
Italy

Giacomo Ricotti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
VIa Pastrengo 14
Rome, 00184
Italy

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