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.
|Date of creation:||2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.newyorkfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.ny.frb.org/rmaghome/staff_rp/ Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Campa, Jose M. & Kedia, Simi, 2000.
"Explaining the diversification discount,"
IESE Research Papers
D/424, IESE Business School.
- 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.
- Hirtle, Beverly, 2004. "Stock repurchases and bank holding company performance," Journal of Financial Intermediation, Elsevier, vol. 13(1), pages 28-57, January.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:369. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber)
If references are entirely missing, you can add them using this form.