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Financial sector debt bias

Author

Listed:
  • Oana Luca

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique)

  • Alexander Tieman

    (FMI - International Money Fund)

Abstract

Most tax systems create a tax bias toward debt finance. Such debt bias increases firm leverage and may negatively affect financial stability. This paper presents novel evidence on debt bias in the "non- traditional"financial sector—i.e., investment banks and non-bank financial intermediaries such as finance and insurance companies. It also shows how debt bias in the financial sector has been affected by the global financial crisis. The paper finds debt bias to be pervasive, explaining as much as 10 percentage points of bank leverage. These effects are more pronounced before than after the global financial crisis, explained by the post-crisis focus on rebuilding buffers. Going forward, as buffers have largely been re- built, debt bias is once again gaining prominence as a key driver of leverage decisions of financial firms, underscoring the importance of policy reform at this juncture.

Suggested Citation

  • Oana Luca & Alexander Tieman, 2019. "Financial sector debt bias," Post-Print hal-02285903, HAL.
    • Handle: RePEc:hal:journl:hal-02285903
    DOI: 10.1016/j.jbankfin.2019.07.017
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    Cited by:

    1. De Mooij, Ruud & Hebous, Shafik, 2018. "Curbing corporate debt bias: Do limitations to interest deductibility work?," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 368-378.
    2. Pietro Dallari & Nicolas End & Fedor Miryugin & Alexander F. Tieman & Seyed Reza Yousefi, 2020. "Pouring oil on fire: interest deductibility and corporate debt," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1520-1556, December.
    3. Borsuk, Marcin & Kowalewski, Oskar & Qi, Jianping, 2023. "The dark side of bank taxes," Journal of Banking & Finance, Elsevier, vol. 157(C).

    More about this item

    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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