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The Effects of Competition from S Corporations on the Organizational Form Choice of Rival C Corporations

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  • Michael P. Donohoe
  • Petro Lisowsky
  • Michael A. Mayberry

Abstract

Subchapter C of the U.S. Internal Revenue Code levies an entity‐level tax on corporate profits, whereas Subchapter S allows corporations meeting specific criteria to elect out of this tax. Despite these differences, C and S corporations regularly compete for customers and capital. We examine whether and the extent to which competition from S corporations influences the future organizational form choice of rival C corporations and explore outcomes of this choice. Using data for 4,462 private U.S. commercial banks grouped by Metropolitan Statistical Area during 1997–2010, we find that greater competition from S corporation banks increases the likelihood that rival C corporation banks convert to Subchapter S status. We estimate that the aggregate first‐year tax savings from S conversion exceed $372 million. Consistent with these savings being used to maintain competitive parity with rivals, we find that converting banks increase their interest rates on customer deposits and advertising intensity. Our findings provide insight into whether competition from tax‐advantaged firms influences the organizational form choice of rival tax‐disadvantaged firms. Les répercussions de la concurrence des sociétés S sur la forme d'organisation choisie par les sociétés C rivales Le sous‐chapitre C de l'Internal Revenue Code des États‐Unis prévoit la perception d'un impôt sur les bénéfices d'entreprise à l’échelle de l'entité, tandis que le sous‐chapitre S permet aux sociétés respectant certains critères précis de produire un choix qui les soustrait à cet impôt. Malgré ces différences, les sociétés assujetties aux sous‐chapitres C et S (sociétés C et sociétés S) se disputent régulièrement les clients et les capitaux. Les auteurs se demandent si la concurrence des sociétés S influe sur la forme d'organisation que choisissent ultérieurement les sociétés C rivales — et, le cas échéant, dans quelle mesure — et ils étudient également les résultats de ce choix. En analysant les données relatives à 4 462 banques commerciales privées américaines groupées par zone statistique métropolitaine (Metropolitan Statistical Area) au cours de la période s’échelonnant de 1997 à 2010, ils constatent que l'intensification de la concurrence des banques ayant le statut de sociétés S accroît la probabilité que les banques rivales ayant celui de sociétés C se convertissent en sociétés S. Les auteurs estiment que les économies d'impôt agrégées résultant de la conversion au statut de société S excèdent 372 millions de dollars la première année. Si tant est que ces économies sont utilisées pour maintenir la parité concurrentielle avec les sociétés rivales, les auteurs constatent que la conversion des banques entraîne la hausse de leurs taux d'intérêt sur les dépôts des clients et l'augmentation de l'intensité de la publicité. Ces observations nous éclairent quant à savoir si la concurrence de sociétés jouissant d'un avantage fiscal influe sur la forme d'organisation que choisissent les sociétés rivales en situation de désavantage fiscal.

Suggested Citation

  • Michael P. Donohoe & Petro Lisowsky & Michael A. Mayberry, 2019. "The Effects of Competition from S Corporations on the Organizational Form Choice of Rival C Corporations," Contemporary Accounting Research, John Wiley & Sons, vol. 36(3), pages 1784-1823, September.
  • Handle: RePEc:wly:coacre:v:36:y:2019:i:3:p:1784-1823
    DOI: 10.1111/1911-3846.12464
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    Cited by:

    1. Edward R. Lawrence & Ca Nguyen & Alejandro Pacheco, 2024. "Interest Rate Competition among C Banks, S Banks, and Credit Unions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 65(2), pages 219-242, June.
    2. 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.
    3. Harald J. Amberger & Saskia Kohlhase, 2023. "International taxation and the organizational form of foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 54(8), pages 1529-1561, October.

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