Eliminating the Tax Shield through Allowance for Corporate Equity: Cross-Border Credit Supply Effects

Sonny Biswas; Balint L Horvath; Wei Zhai

doi:10.1111/jmcb.12877

Eliminating the Tax Shield through Allowance for Corporate Equity: Cross-Border Credit Supply Effects

Sonny Biswas^*, Balint L Horvath^*, Wei Zhai^*

^*Corresponding author for this work

Research output: Contribution to journal › Article (Academic Journal) › peer-review

3 Citations (Scopus)

118 Downloads (Pure)

Abstract

This paper studies how the elimination of the corporate tax bias on bank leverage affects banks' credit provisioning using a quasi-natural experiment, the introduction of an allowance for corporate equity (ACE) in Belgium. We find that affected banks increased their contribution within cross-border syndicated loan facilities relative to other foreign banks, and that this effect was stronger for relatively safe borrowers. We estimate that Belgian bank-led loans had on average 20–50 basis points lower spreads when ACE was in effect. Finally, our results suggest a relatively large, positive credit supply effect domestically.

Original language	English
Number of pages	35
Journal	Journal of Money, Credit and Banking
Early online date	28 Nov 2021
DOIs	https://doi.org/10.1111/jmcb.12877
Publication status	E-pub ahead of print - 28 Nov 2021

Bibliographical note

Funding Information:
All authors contributed equally. Wei Zhai acknowledges financial support from the Program for Innovation Research in Central University of Finance and Economics. We thank Franziska Bremus (discussant), Adam Copeland, Ralph de Haas, Fabiana Gomez, John Hackney (discussant), Harry Huizinga, Vasso Ioannidou (discussant), Gianluca Mattarocci (discussant), Andrea Moro (discussant), Klaus Schaeck, participants of the IFABS 2017 conference in Oxford, the 6th Annual Corporate Finance Conference in Exeter, the 26th MBF Conference in Palermo, the 4th IWH‐FIN‐FIRE Workshop in Halle, the EEA‐ESEM 2018, the 2018 FMA Annual Meeting, the 2018 European Banking Authority Workshop in London, the 2019 IBEFA‐ASSA Annual Meeting, the 2019 FIRS conference and the 2019 EFMA conference, the editor, Pok‐sang Lam, and two anonymous referees for useful comments and suggestions.

Publisher Copyright:
© 2021 The Ohio State University

Research Groups and Themes

AF Banking
AF Corporate Finance

Keywords

Cross-border lending
Syndicated loans
Credit supply
Allowance for Corporate Equity
Bank taxation

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10.1111/jmcb.12877

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title = "Eliminating the Tax Shield through Allowance for Corporate Equity: Cross-Border Credit Supply Effects",

abstract = "This paper studies how the elimination of the corporate tax bias on bank leverage affects banks' credit provisioning using a quasi-natural experiment, the introduction of an allowance for corporate equity (ACE) in Belgium. We find that affected banks increased their contribution within cross-border syndicated loan facilities relative to other foreign banks, and that this effect was stronger for relatively safe borrowers. We estimate that Belgian bank-led loans had on average 20–50 basis points lower spreads when ACE was in effect. Finally, our results suggest a relatively large, positive credit supply effect domestically. ",

keywords = "Cross-border lending, Syndicated loans, Credit supply, Allowance for Corporate Equity, Bank taxation",

author = "Sonny Biswas and Horvath, \{Balint L\} and Wei Zhai",

note = "Funding Information: All authors contributed equally. Wei Zhai acknowledges financial support from the Program for Innovation Research in Central University of Finance and Economics. We thank Franziska Bremus (discussant), Adam Copeland, Ralph de Haas, Fabiana Gomez, John Hackney (discussant), Harry Huizinga, Vasso Ioannidou (discussant), Gianluca Mattarocci (discussant), Andrea Moro (discussant), Klaus Schaeck, participants of the IFABS 2017 conference in Oxford, the 6th Annual Corporate Finance Conference in Exeter, the 26th MBF Conference in Palermo, the 4th IWH‐FIN‐FIRE Workshop in Halle, the EEA‐ESEM 2018, the 2018 FMA Annual Meeting, the 2018 European Banking Authority Workshop in London, the 2019 IBEFA‐ASSA Annual Meeting, the 2019 FIRS conference and the 2019 EFMA conference, the editor, Pok‐sang Lam, and two anonymous referees for useful comments and suggestions. Publisher Copyright: {\textcopyright} 2021 The Ohio State University",

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language = "English",

journal = "Journal of Money, Credit and Banking",

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AU - Biswas, Sonny

AU - Horvath, Balint L

AU - Zhai, Wei

N1 - Funding Information: All authors contributed equally. Wei Zhai acknowledges financial support from the Program for Innovation Research in Central University of Finance and Economics. We thank Franziska Bremus (discussant), Adam Copeland, Ralph de Haas, Fabiana Gomez, John Hackney (discussant), Harry Huizinga, Vasso Ioannidou (discussant), Gianluca Mattarocci (discussant), Andrea Moro (discussant), Klaus Schaeck, participants of the IFABS 2017 conference in Oxford, the 6th Annual Corporate Finance Conference in Exeter, the 26th MBF Conference in Palermo, the 4th IWH‐FIN‐FIRE Workshop in Halle, the EEA‐ESEM 2018, the 2018 FMA Annual Meeting, the 2018 European Banking Authority Workshop in London, the 2019 IBEFA‐ASSA Annual Meeting, the 2019 FIRS conference and the 2019 EFMA conference, the editor, Pok‐sang Lam, and two anonymous referees for useful comments and suggestions. Publisher Copyright: © 2021 The Ohio State University

PY - 2021/11/28

Y1 - 2021/11/28

N2 - This paper studies how the elimination of the corporate tax bias on bank leverage affects banks' credit provisioning using a quasi-natural experiment, the introduction of an allowance for corporate equity (ACE) in Belgium. We find that affected banks increased their contribution within cross-border syndicated loan facilities relative to other foreign banks, and that this effect was stronger for relatively safe borrowers. We estimate that Belgian bank-led loans had on average 20–50 basis points lower spreads when ACE was in effect. Finally, our results suggest a relatively large, positive credit supply effect domestically.

AB - This paper studies how the elimination of the corporate tax bias on bank leverage affects banks' credit provisioning using a quasi-natural experiment, the introduction of an allowance for corporate equity (ACE) in Belgium. We find that affected banks increased their contribution within cross-border syndicated loan facilities relative to other foreign banks, and that this effect was stronger for relatively safe borrowers. We estimate that Belgian bank-led loans had on average 20–50 basis points lower spreads when ACE was in effect. Finally, our results suggest a relatively large, positive credit supply effect domestically.

KW - Cross-border lending

KW - Syndicated loans

KW - Credit supply

KW - Allowance for Corporate Equity

KW - Bank taxation

U2 - 10.1111/jmcb.12877

DO - 10.1111/jmcb.12877

M3 - Article (Academic Journal)

SN - 0022-2879

JO - Journal of Money, Credit and Banking

JF - Journal of Money, Credit and Banking

ER -

Eliminating the Tax Shield through Allowance for Corporate Equity: Cross-Border Credit Supply Effects

Abstract

Bibliographical note

Research Groups and Themes

Keywords

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