Abstract
The tax benefit of interest deductibility encourages debt financing, but regulatory constraints create dependency between bank leverage and asset risk. Using a large international sample of banks this paper shows that banks located in high-tax countries have higher leverage and lower average asset risk-weights. This trade-off is stronger when regulation is more stringent and for banks with less capital. Nonfinancial firms’ leverage and asset risk are positively related to tax rates, as further evidence of the regulatorily induced adjustment of portfolio risk. A difference-in-difference analysis provides support for a causal interpretation of these results. Overall, higher tax rates are positively correlated with systemic risk, suggesting that the lower asset risk does not offset the risk-inducing effect of tax rates on bank leverage.
Original language | English |
---|---|
Article number | 101629 |
Journal | Journal of Corporate Finance |
Volume | 64 |
Early online date | 21 Apr 2020 |
DOIs | |
Publication status | Published - 1 Oct 2020 |
Research Groups and Themes
- AF Banking
Keywords
- Bank leverage
- Bank regulation
- Bank risk
- Corporate taxation
- Debt bias