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Taxes and bank capital structure

Author

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  • Schepens, Glenn

Abstract

This paper shows that a reduction in tax discrimination between debt and equity funding leads to better capitalized financial institutions. The paper exploits exogenous variation in the tax treatment of debt and equity created by the introduction of a tax shield for equity. The results demonstrate that a more equal treatment of debt and equity increases bank capital ratios, driven by an increase in common equity. The change also leads to a significant reduction in risk taking for ex-ante low capitalized banks. Overall, the findings suggest that tax shields could be a valuable and innovative policy tool for bank regulators.

Suggested Citation

  • Schepens, Glenn, 2016. "Taxes and bank capital structure," Journal of Financial Economics, Elsevier, vol. 120(3), pages 585-600.
    • Handle: RePEc:eee:jfinec:v:120:y:2016:i:3:p:585-600
    DOI: 10.1016/j.jfineco.2016.01.015
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    More about this item

    Keywords

    Bank capital structure; Bank regulation; Tax shields;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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