How Do Financial Institutions React to a Tax Increase?

Schandlbauer, Alexander

doi:10.2139/ssrn.2397030

Cited by 11 publications

(14 citation statements)

References 36 publications

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“…See Gordon and MacKie‐Mason (, ), Givoly et al. (), Chetty and Saez (), Hanlon and Joopes (), Heider and Ljungqvist (), Schepens (), and Schandlbauer ().…”

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confidence: 99%

Beyond Random Assignment: Credible Inference and Extrapolation in Dynamic Economies

Hennessy¹,

Strebulaev²

2019

The Journal of Finance

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We derive analytical relationships between shock responses and theory‐implied causal effects (comparative statics) in dynamic settings with linear profits and linear‐quadratic stock accumulation costs. For permanent profitability shocks, responses can have incorrect signs, undershoot, or overshoot depending on the size and sign of realized changes. For profitability shocks that are i.i.d., uniformly distributed, binary, or unanticipated and temporary, there is attenuation bias, which exceeds 50% under plausible parameterizations. We derive a novel sufficient condition for profitability shock responses to equal causal effects: martingale profitability. We establish a battery of sufficient conditions for correct sign estimation, including stochastic monotonicity. Simple extrapolation/error correction formulas are presented.

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“…See Gordon and MacKie‐Mason (, ), Givoly et al. (), Chetty and Saez (), Hanlon and Joopes (), Heider and Ljungqvist (), Schepens (), and Schandlbauer ().…”

mentioning

confidence: 99%

Beyond Random Assignment: Credible Inference and Extrapolation in Dynamic Economies

Hennessy¹,

Strebulaev²

2019

The Journal of Finance

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“…Based on bank balance sheet data for 82 countries, they confirm that banks' reaction to taxation is, on average, similar to that of non-financial firms and that large banks are less tax-sensitive than small ones. 3 Related studies for the United States (Milonas, 2016;Schandlbauer, 2017) confirm a significant impact of tax changes on bank leverage, which differs across bank characteristics like capitalization and size. Using Italian data, Gambacorta et al (2017) provide evidence that banks reduce leverage following tax reductions and that non-deposit liabilities decline more than deposits.…”

Section: Motivationmentioning

confidence: 99%

Interactions between Regulatory and Corporate Taxes: How Is Bank Leverage Affected?

2018

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Regulatory bank levies set incentives for banks to reduce leverage. At the same time, corporate income taxation makes funding through debt more attractive. In this paper, we explore how regulatory levies affect bank capital structure, depending on corporate income taxation. Based on bank balance sheet data from 2006 to 2014 for a panel of EU-banks, our analysis yields three main results: The introduction of bank levies leads to lower leverage as liabilities become more expensive. This effect is weaker the more elevated corporate income taxes are. In countries charging very high corporate income taxes, the incentives of bank levies to reduce leverage turn ineffective. Thus, bank levies can counteract the debt bias of taxation only partially.

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“…Since interest payments are in general deductible from the corporate income tax base whereas equity returns are not, firms have an incentive to use higher leverage. The effect of interest tax shields on firm leverage has been widely studied for non‐financial firms (e.g., Arena & Roper, ; Desai et al, ; Faccio & Xu, ; Feld et al, ; Graham, ; Graham & Tucker, ; Heider & Ljungqvist, ) and for banks (e.g., De Mooij & Keen, ; Hemmelgarn & Teichmann, ; Horváth, ; Milonas, ; Schandlbauer, ). However, banks are, in principle, more systemic than non‐financial firms so the effect of this tax bias is particularly pernicious for them.…”

Section: Introductionmentioning

confidence: 99%

“…These papers show a negative (positive) relationship between tax rates and bank capital (leverage) ratios for international (e.g. De Mooij & Keen, ; Hemmelgarn & Teichmann, ; Horváth, ) and single‐country samples (Bond et al, ; Gambacorta et al, ; Milonas, ; Schandlbauer, ). Our paper differs from these papers in two aspects.…”

Section: Introductionmentioning

confidence: 99%

Is bank capital sensitive to a tax allowance on marginal equity?

Martín-Flores

Moussu

2018

Euro Fin Management

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This paper studies how bank capital changes following the implementation and removal of a tax incentive on equity. We examine the impact of the introduction of a tax allowance in Italy granted to banks (and other firms) that increase their equity from a base year. Using a difference‐in‐differences setting, we observe an 8.83% increase in bank capital ratios following the implementation of this reform. When this tax mechanism is phased out, we observe an opposite effect on the equity ratio, showing the absence of a hysteresis effect in bank capital. We document a heterogeneous effect for large and small banks.

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How Do Financial Institutions React to a Tax Increase?

Cited by 11 publications

References 36 publications

Beyond Random Assignment: Credible Inference and Extrapolation in Dynamic Economies

Beyond Random Assignment: Credible Inference and Extrapolation in Dynamic Economies

Interactions between Regulatory and Corporate Taxes: How Is Bank Leverage Affected?

Is bank capital sensitive to a tax allowance on marginal equity?

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