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Why do Subchapter S Banks Convert to C Banks?

Author

Listed:
  • Alejandro Pacheco

    (University of Arkansas - Fort Smith)

  • Chun-Hao Chang

    (Florida International University)

  • Edward R. Lawrence

    (Florida International University)

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.

Suggested Citation

  • Alejandro Pacheco & Chun-Hao Chang & Edward R. Lawrence, 2022. "Why do Subchapter S Banks Convert to C Banks?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 62(3), pages 143-161, December.
    • Handle: RePEc:kap:jfsres:v:62:y:2022:i:3:d:10.1007_s10693-021-00369-6
    DOI: 10.1007/s10693-021-00369-6
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    References listed on IDEAS

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