Eliminating the Tax Shield Through Allowance for Corporate Equity: Cross-Border Credit Supply Effects

51 Pages Posted: 15 Nov 2018

See all articles by Swarnava Biswas

Swarnava Biswas

University of Bristol

Bálint L. Horváth

University of Bristol

Wei Zhai

University of Bristol

Date Written: October 23, 2018

Abstract

This paper studies how the elimination of the corporate tax bias on bank leverage through an allowance for corporate equity (ACE) affects banks' cross-border credit allocation. Using the introduction of ACE in Belgium in 2006 as an exogenous source of variation, we find that ACE leads to an overall increase in cross-border credit supply: Belgian banks contributed more within a loan facility relative to other foreign banks after the tax change, and Belgian bank-lead loans had on average 20-50 basis points lower spreads. We find an especially large impact for relatively safe borrowers, with country heterogeneity also playing some role in the strength of the cross-border credit supply effect. Finally, our results suggest a relatively large, positive, credit supply effect domestically. Our results suggest that ACE can be a useful policy tool to incentivize higher bank capitalization without hurting credit supply, but also that tax policy is a potential source of credit market spillovers.

Keywords: Cross-Border Lending, Syndicated Loans, Credit Supply, Allowance for Corporate Equity, Bank Taxation

JEL Classification: G21, G28, E51, H25

Suggested Citation

Biswas, Swarnava and Horváth, Bálint L. and Zhai, Wei, Eliminating the Tax Shield Through Allowance for Corporate Equity: Cross-Border Credit Supply Effects (October 23, 2018). Available at SSRN: https://ssrn.com/abstract=3271366 or http://dx.doi.org/10.2139/ssrn.3271366

Swarnava Biswas

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Bálint L. Horváth (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Wei Zhai

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

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