The real effects of bank taxation: Evidence for corporate financing and investment

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Netherlands), 2021-08, Vol.69, p.101989, Article 101989
• Main Authors: Sobiech, Anna L., Chronopoulos, Dimitris K., Wilson, John O.S.
• Format: Article
• Language: English
• Subjects: Bank taxation; Corporate financing; Credit supply; Investment; Japanese banks; Natural experiment
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2021.101989

This paper examines how bank taxation affects the financing decisions and investment activities of corporates. Exploiting exogenous tax variation at the bank level, we show that taxing banks' gross profits leads to higher bank leverage, and results in lower risk and credit supply. The contraction in credit supply has implications for corporate debt financing and investment activity. Corporates more exposed to banks subject to gross profit tax exhibit lower leverage and rely less on bank debt. Corporates partly offset lower bank financing by switching to bond financing. The cost of bond financing increases with corporate exposure to the tax. A greater exposure also impacts negatively on corporate investment activity. Overall, our results highlight the importance of bank taxation for corporate financing and investment decisions. •We investigate the impact of bank taxation on bank lending, and corporate financing and investment using the Ishihara tax as a source of exogenous variation.•Bank taxation leads to higher bank leverage,lower risk, and reduces credit supplied to corporate borrowers.•Corporates more exposed to bank taxes via existing banking relationships exhibit lower leverage, rely less on bank debt and increase bond financing.•The cost of bond financing increases for corporates more exposed to the tax.•Bank taxation also leads to a reduction in corporate investment activity.