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

57 Pages Posted: 15 Nov 2018 Last revised: 19 Jul 2019

See all articles by Swarnava Biswas

Swarnava Biswas

University of Bristol

Bálint L. Horváth

University of Bristol

Wei Zhai

Central University of Finance and Economics (CUFE)

Date Written: July 18, 2019

Abstract

This paper studies how the elimination of the corporate tax bias on bank leverage affects banks' credit provisioning using the introduction of an allowance for corporate equity (ACE) in Belgium. We find that affected banks increased their contribution within cross-border syndicated loan facilities relative to other foreign banks, and that this effect was stronger for relatively safe borrowers; in neighboring countries; and where Belgian banks had subsidiaries. We estimate that Belgian bank-lead loans had on average 20-50 basis points lower spreads when ACE was in effect. Finally, our results suggest a relatively large, positive credit supply effect domestically. A back-of-the-envelope calculation suggests that 1 dollar of ACE tax deduction resulted in roughly 123 dollars of new loans overall.

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 (July 18, 2019). 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

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

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