Why do Subchapter S Banks Convert to C Banks?

Alejandro Pacheco (), Chun-Hao Chang () and Edward R. Lawrence ()
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Alejandro Pacheco: University of Arkansas - Fort Smith
Chun-Hao Chang: Florida International University
Edward R. Lawrence: Florida International University

Journal of Financial Services Research, 2022, vol. 62, issue 3, No 1, 143-161

Abstract: Abstract The Small Business Job Protection Act of 1996 allows US banks to adopt subchapter S status. Banks use this status to avoid double taxation. However, the Act restricts the number of shareholders for subchapter S banks to 100. Many banks adopt subchapter S and then transition back to C banks. We investigate why Subchapter S banks convert to C banks. We find that when these subchapter S banks are in financial distress, they convert to C banks to access additional equity capital needed to write off losses and rebalance their asset portfolio. Post-conversion, we observe a marked increase in equity, a decline in risk factors, and an improvement in profitability ratios.

Keywords: Small Business Job Protection Act of 1996; subchapter S banks; subchapter S conversion to C; G21; G28 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10693-021-00369-6

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