International Tax and Public Finance

, Volume 21, Issue 4, pp 645–693

Tax reforms and the capital structure of banks


DOI: 10.1007/s10797-014-9321-4

Cite this article as:
Hemmelgarn, T. & Teichmann, D. Int Tax Public Finance (2014) 21: 645. doi:10.1007/s10797-014-9321-4


This paper studies the link between corporate income tax (CIT) reforms and domestic banks’ financing decisions. We use a dataset of CIT reforms and estimate the effect of tax rate changes on leverage, dividend policies and earnings management of banks. The results suggest that taxation influences all three variables. Leverage increases with the CIT rate in the first three years after the reform. The reason is that the statutory CIT rate determines the value of the debt tax shield. A higher tax rate increases incentives to use debt finance when interest payments are deductible from the CIT base. The tax effects we find are statistically and economically significant but considerably lower than those found in previous research. Also, dividend pay-outs increase after an increase in CIT rates. This could indicate that banks actively manage their pay-out policies around tax reforms and adjust their capital structure with changes in dividends. Furthermore, banks increase loss loan reserves in anticipation of tax rate cuts since losses become less valuable with lower CIT rates.


Corporate income tax Tax reform Debt–equity bias Leverage Banks Capital structure 

JEL Classification

G21 H25 H32 

Copyright information

© European Union 2014

Authors and Affiliations

  1. 1.Directorate-General for Taxation and Customs UnionEuropean CommissionBrusselsBelgium
  2. 2.Faculty of Economics and Business AdministrationFrankfurt am MainGermany

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