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Regulation, tax and capital structure: evidence from administrative data on Italian banks

Steve Bond (), Kyung Yeon Ham, Giorgia Maffini (), Andrea Nobili () and Giacomo Ricotti ()
Additional contact information
Steve Bond: University of Oxford
Kyung Yeon Ham: University of Oxford
Giorgia Maffini: University of Oxford
Andrea Nobili: Associazione Bancaria Italiana
Giacomo Ricotti: Bank of Italy

No 361, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

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 (search for similar items in EconPapers)
JEL-codes: G21 G32 G38 H25 H32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-eur, nep-law, nep-pbe and nep-pub
Date: 2016-10
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