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The impact of tax law changes on bank dividend policy, sell-offs, organizational form, and industry structure

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  • Hamid Mehran
  • Michael Suher

Abstract

This paper investigates the effect at the bank and industry level of a 1996 tax law change allowing commercial banks to elect S-corporation status. By the end of 2007, roughly one in three commercial banks had either opted for or converted to the S-corporation form of organization. Our study analyzes the effect of this conversion on bank dividend payouts. It also examines the effect S-corporation status has on a community bank's likelihood of sell-off and measures a firm's sensitivity to tax rates based on its choice of organizational form. We document that dividend payouts increase substantially after a bank's conversion to S status. Moreover, community banks that convert are significantly less likely to be sold than their C-corporation peers. We estimate a tax rate elasticity of conversion in the range of 2 to 3 percent for every 1-percentage-point change in relative tax rates. Overall, our results provide evidence that Subchapter S status has significant effects on bank conduct and industry structure.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 369.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:369

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Keywords: Banks and banking - Taxation ; Dividends;

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  1. William Keeton, 2003. "The role of community banks in the U.S. economy," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 15-43.
  2. Hirtle, Beverly, 2004. "Stock repurchases and bank holding company performance," Journal of Financial Intermediation, Elsevier, vol. 13(1), pages 28-57, January.
  3. Goolsbee, Austan, 2004. "The impact of the corporate income tax: evidence from state organizational form data," Journal of Public Economics, Elsevier, vol. 88(11), pages 2283-2299, September.
  4. Campa, Jose M. & Kedia, Simi, 2000. "Explaining the diversification discount," IESE Research Papers D/424, IESE Business School.
  5. Scott E. Hein & Timothy W. Koch & S. Scott MacDonald, 2005. "On the uniqueness of community banks," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 15-36.
  6. Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2007. "Did Firms Substitute Dividends for Share Repurchases after the 2003 Reductions in Shareholder Tax Rates?," NBER Working Papers 13601, National Bureau of Economic Research, Inc.
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