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Does ownership form in community banking impact profitability?

Author

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  • Peter Westort
  • Russ Kashian
  • Richard Cummings

Abstract

Purpose - The purpose of this paper is to examine the profitability of different ownership forms of banks. The two ownership forms are corporations that elect to be taxed as a Subchapter S corporation (limited to 100 shareholders) as opposed to those corporations that do not make this election. The impact this election has on the dividends paid to the investors is examined. Design/methodology/approach - This paper uses Call Report Data on Wisconsin banks as collected by SNL Securities as its database. The research methodology uses two measures of performance: dividend ratio and accounting return on assets (ROA). The dividend ratio is defined as dividends as a percentage of net income (dividends/net income). Accounting return on investment is net income as a percentage of total assets (net income/total assets) and is a measure of profitability. A number of regressions were created with these as the endogenenous variables and a heteroskedasticity-corrected ordinary least squares (OLS) model was used. Findings - Subchapter S banks were found to be more profitable (as measured by ROA). However, when taxes are taken into account, there is no practical difference in profitability between the two types of corporate structure. Research limitations/implications - By limiting the analysis to Wisconsin, a single state, confusion that may be caused by both state laws (personal and corporate) and local corporate cultures is avoided. Practical implications - The practical implications of this research can guide the federal government in determining whether this form of stock ownership is a device that reduces or increases federal tax revenues. It can also provide insight to the stockholders of these banks into the differences in profitability these corporate forms offer. Originality/value - While earlier literature has reviewed the concept of Subchapter S corporations and its theoretical impact, little research has been conducted that tests the actual results. Due to the private nature of the corporate form (these types of corporations are often not publicly traded and have no incentive to reveal private financial records), this original research is the result of the public nature of banks that provide a rich dataset for us to examine.

Suggested Citation

  • Peter Westort & Russ Kashian & Richard Cummings, 2010. "Does ownership form in community banking impact profitability?," Managerial Finance, Emerald Group Publishing, vol. 36(2), pages 122-133, January.
  • Handle: RePEc:eme:mfipps:v:36:y:2010:i:2:p:122-133
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    References listed on IDEAS

    as
    1. Berger, Allen N. & Humphrey, David B., 1991. "The dominance of inefficiencies over scale and product mix economies in banking," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 117-148, August.
    2. repec:hrv:faseco:30728046 is not listed on IDEAS
    3. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    4. R. Glenn Hubbard, 1993. "Corporate Tax Integration: A View from the Treasury Department," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 115-132, Winter.
    5. R. Alton Gilbert & David C. Wheelock, 2007. "Measuring commercial bank profitability: proceed with caution," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 515-532.
    6. Nadeau, Serge J., 1988. "A Model to Measure the Effects of Taxes on the Real and Financial Decisions of the Firm," National Tax Journal, National Tax Association;National Tax Journal, vol. 41(4), pages 467-481, December.
    7. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    8. Nadeau, Serge J., 1988. "A Model to Measure the Effects of Taxes on the Real and Financial Decisions of the Firm," National Tax Journal, National Tax Association, vol. 41(4), pages 467-81, December.
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