The impact of tax law changes on bank dividend policy, sell-offs, organizational form, and industry structure

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 369

Classification and Topics

• Classification: Wirtschaft ; Relation of Economics to Other Disciplines ; Tax Law ; Business Taxes and Subsidies including sales and value-added (VAT) ; Financial Institutions and Services: General
• Subject: Tax law ; S corporations ; organizational form ; dividend policy ; sell-offs ; industry structure

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mehran, Hamid ; Suher, Michael
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/60963
• Last update: 10.03.2025, 11:43 AM CET