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The effect of corporate taxation on bank transparency: Evidence from loan loss provisions

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  • Andries, Kathleen
  • Gallemore, John
  • Jacob, Martin

Abstract

We examine how the corporate tax system, through its treatment of loan losses, affects bank financial reporting. Exploiting cross-country and intertemporal variation in income tax rates and loan loss provision deductibility, we find that loan loss provisions are increasing in the tax rate for countries that permit general provision tax deductibility. When general provisions are deductible, a 1 percentage point rate increase leads to a provision increase of 4.9% of the sample average. This effect is driven by the tax system's encouragement of timelier loan loss recognition, suggesting that corporate taxation is an important determinant of bank financial reporting transparency.

Suggested Citation

  • Andries, Kathleen & Gallemore, John & Jacob, Martin, 2017. "The effect of corporate taxation on bank transparency: Evidence from loan loss provisions," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 307-328.
    • Handle: RePEc:eee:jaecon:v:63:y:2017:i:2:p:307-328
    DOI: 10.1016/j.jacceco.2017.03.004
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    4. Morais, Bernardo & Ormazabal, Gaizka & Peydro, J.L. & Roa, Monica & Sarmiento Paipilla, Miguel, 2020. "Forward Looking Loan Provisions : Credit Supply and Risk-Taking," Other publications TiSEM fe99a48f-f94a-41d8-bf3f-3, Tilburg University, School of Economics and Management.
    5. Lucia Alessi & Brunella Bruno & Elena Carletti & Katja Neugebauer & Isabella Wolfskeil, 2021. "Cover your assets: non-performing loans and coverage ratios in Europe [Bias-corrected matching estimators for average treatment effects]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 36(108), pages 685-733.
    6. Ozili, Peterson K, 2017. "Bank Loan Loss Provisions, Investor Protection and the Macroeconomy," MPRA Paper 80147, University Library of Munich, Germany.
    7. Jiang Cheng & Travis Chow & Tzu‐Ting Lin & Jeffrey Ng, 2022. "The effect of accounting for income tax uncertainty on tax‐deductible loss accruals for private insurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(2), pages 505-544, June.
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    9. Ormazabal, Gaizka & López-Espinosa, Germán & Sakasai, Yuki, 2020. "Switching From Incurred to Expected Loan Loss Provisioning: Early Evidence," CEPR Discussion Papers 14803, C.E.P.R. Discussion Papers.
    10. Alessi, Lucia & Bruno, Brunella & Carletti, Elena & Neugebauer, Katja, 2019. "What drives bank coverage ratios: Evidence from the euro area," Working Papers 2019-14, Joint Research Centre, European Commission.
    11. Gawehn, Vanessa, 2019. "Banks and corporate income taxation: A review," arqus Discussion Papers in Quantitative Tax Research 247, arqus - Arbeitskreis Quantitative Steuerlehre.
    12. Ozili, Peterson K, 2022. "Determinants of bank income smoothing using loan loss provisions in the United Kingdom," MPRA Paper 112047, University Library of Munich, Germany.
    13. Ozili, Peterson K, 2018. "Bank Loan Loss Provisions, Investor Protection and the Macroeconomy," MPRA Paper 80281, University Library of Munich, Germany.
    14. Fan, Yaoyao & Jiang, Yuxiang & Zhang, Xuezhi & Zhou, Yue, 2019. "Women on boards and bank earnings management: From zero to hero," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
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    17. Dutt, Verena K. & Nicolay, Katharina & Vay, Heiko & Voget, Johannes, 2019. "Can European banks' country-by-country reports reveal profit shifting? An analysis of the information content of EU banks' disclosures," ZEW Discussion Papers 19-042, ZEW - Leibniz Centre for European Economic Research.
    18. Hoppe, Thomas & Schanz, Deborah & Sturm, Susann & Sureth, Caren, 2019. "Measuring tax complexity across countries: A survey study on MNCs," arqus Discussion Papers in Quantitative Tax Research 245, arqus - Arbeitskreis Quantitative Steuerlehre.
    19. Degryse, Hans & Huylebroek, Cédric, 2023. "Fiscal support and banks’ loan loss provisions during the COVID-19 crisis," Journal of Financial Stability, Elsevier, vol. 67(C).
    20. Yuehua Li & Zhentao Liu & Sha Pei, 2020. "Does bank transparency benefit from the Volcker Rule?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1471-1500, June.
    21. Subagio Efendi & Salim Darmadi & Robert Czernkowski, 2022. "Are Financial Institutions Tax Aggressive? Evidence From Corporate Tax Return Data," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 25(2), pages 175-204, August.
    22. John Gallemore & Martin Jacob, 2020. "Corporate Tax Enforcement Externalities and the Banking Sector," Journal of Accounting Research, Wiley Blackwell, vol. 58(5), pages 1117-1159, December.
    23. Germán López‐Espinosa & Gaizka Ormazabal & Yuki Sakasai, 2021. "Switching from Incurred to Expected Loan Loss Provisioning: Early Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 59(3), pages 757-804, June.
    24. Chen, Hanwen & Liu, Siyi & Wang, Junjie & Wu, Zhijuan, 2022. "The effect of geographic proximity on corporate tax avoidance: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 72(C).

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    More about this item

    Keywords

    Bank transparency; Bank regulation; Loan loss provisions; Corporate taxation;
    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
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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