The real effects of bank taxation: evidence for corporate financing and investment

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Abstract

This paper examines how bank taxation affects the financing decisions and investment activities of corporates. Exploiting exogenous tax variation at the bank level, we show that taxing banks’ gross profits leads to higher bank leverage, and results in lower bank risk and credit supply. The contraction in credit supply has implications for corporate debt financing and investment activity. Corporates more exposed to banks subject to gross profit tax exhibit lower leverage and rely less on bank debt. Corporates partly offset lower bank financing by switching to bond financing. The cost of bond financing increases with corporate exposure to the tax. A greater exposure also impacts negatively on corporate investment activity. Overall, our results highlight the importance of bank taxation for corporate financing and investment decisions.
Original languageEnglish
Article number101989
JournalJournal of Corporate Finance
VolumeIn press
Early online date1 Jun 2021
DOIs
Publication statusE-pub ahead of print - 1 Jun 2021

Keywords

  • Bank taxation
  • Credit supply
  • Japanese banks
  • Natural experiment
  • Corporate financing
  • Investment

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