How do financial institutions react to a tax increase?

Alexander Schandlbauer

Journal of Financial Intermediation, 2017, vol. 30, issue C, 86-106

Abstract: This paper empirically highlights the role and significance of taxes for the capital structure decisions of banks. Using a difference-in-differences methodology, I show that an increase in the local U.S. state corporate tax rate affects the banks’ financing as well as their operating choices. Better-capitalized banks raise their long-term non-depository debt and thus benefit from an enlarged tax shield. Worse-capitalized banks instead reduce their lending because a higher tax rate increases the tax-adjusted cost of funding, which renders the marginal loan unprofitable.

Keywords: Financial institution; Capital structure; Corporate income tax (search for similar items in EconPapers)
JEL-codes: G21 G30 G32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:30:y:2017:i:c:p:86-106

DOI: 10.1016/j.jfi.2016.08.002

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