The impact of tax law changes on bank dividend policy, sell-offs, organizational form, and industry structure
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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- Keeton, William & Kahn, George A. & Schroeder, Linda & Weiner, Stuart E., 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.
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- Scott E. Hein & Timothy W. Koch & Steven Scott MacDonald, 2005. "On the uniqueness of community banks," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 15-36.
- 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. Full references (including those not matched with items on IDEAS)
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