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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

    as
    1. James Harvey & Jane Padget, 2000. "Subchapter S : a new tool for enhancing the value of community banks," Financial Industry Perspectives, Federal Reserve Bank of Kansas City, issue Dec, pages 17-32.
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    4. Depken II, Craig A. & Hollans, Harris & Swidler, Steve, 2010. "Do tax benefits conferred to Sub-S banks affect their deposit or loan rates?," Finance Research Letters, Elsevier, vol. 7(4), pages 238-245, December.
    5. Chun-Hao Chang & Ajeet Jain & Edward R. Lawrence & Arun J. Prakash, 2016. "The Tax Exemption to Subchapter S Banks: Who Gets the Benefit?," The Financial Review, Eastern Finance Association, vol. 51(3), pages 329-362, August.
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