How do financial institutions react to a tax increase?

Schandlbauer, Alexander

doi:10.1016/j.jfi.2016.08.002

Cited by 49 publications

(24 citation statements)

References 30 publications

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“…When the ACE incentive is applicable, banks increase their equity financing accordingly, but once this incentive disappears their capital ratios do not remain at the same level but rather decrease as more debt is used. The re‐introduction of the debt‐equity tax bias leads to less capitalized banks which is in line with the findings of Schandlbauer (). In column (2), the negative coefficient associated to the variable post indicates lower earnings retention, although the coefficient is not statistically significant.…”

Section: Resultssupporting

confidence: 90%

“…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%

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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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Section: Resultssupporting

confidence: 90%

Section: Introductionmentioning

confidence: 99%

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

Martín-Flores

Moussu

2018

Euro Fin Management

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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%

“…Cummins, Hassett, and Hubbard (1994) estimate adjustment cost parameters based on tax experiments. They assume 1 See MacKie-Mason (1990, 1997), Givoly et al (1992), Chetty and Saez (2005), Hanlon and Joopes (2014), Heider and Ljungqvist (2015), Schepens (2016), andSchandlbauer (2017).…”

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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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Bank Taxes, Leverage, and Risk

Milonas

2016

J Financ Serv Res

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How do financial institutions react to a tax increase?

Cited by 49 publications

References 30 publications

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

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

Beyond Random Assignment: Credible Inference and Extrapolation in Dynamic Economies

Bank Taxes, Leverage, and Risk

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