Tax Planning, Regulatory Capital Planning, and Financial Reporting Strategy for Commercial Banks

We test whether banks' investment and financing policies can be explained by tax status. We document changes in bank holdings of municipal bonds in response to changes in tax rules relating to deductibility of interest expense. We also document an association between banks' marginal tax ra...

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Bibliographic Details
Published in:The Review of financial studies 1990-01, Vol.3 (4), p.625-650
Main Authors: Scholes, Myron S., Wilson, G. Peter, Wolfson, Mark A.
Format: Article
Language:English
Subjects:
Balance sheets
Bank assets
Bank capital
Bank management
Banking industry
Banking regulation
Banks
Commercial banks
Costs
Financial investments
Financial regulation
Financial reporting
Income taxes
Insurance regulation
Investment banking
Investments
Losses
Municipal bonds
Revenue regulations
Tax planning
Tax preference items
Tax rates
Treasuries
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Summary:We test whether banks' investment and financing policies can be explained by tax status. We document changes in bank holdings of municipal bonds in response to changes in tax rules relating to deductibility of interest expense. We also document an association between banks' marginal tax rates and their investment and financing decisions, which is consistent with the existence of tax clienteles. However, banks do not sort themselves perfectly into investment and financing clienteles because of adjustment costs. We posit specific types of transaction-cost impediments to tax planning, and document that banks apparently trade off these costs against tax-planning benefits.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/3.4.625