International Finance Discussion Papers (IFDP)

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November 2016

Banks' Equity Stakes and Lending: Evidence from a Tax Reform

Bastian von Beschwitz and Daniel Foos

Abstract:

Several papers find a positive association between a bank's equity stake in a borrowing firm and lending to that firm. While such a positive cross-sectional correlation may be due to equity stakes benefiting lending, it may also be driven by endogeneity. To distinguish the two, we study a German tax reform that permitted banks to sell their equity stakes tax-free. After the reform, many banks sold their equity stakes, but did not reduce lending to the firms. Thus, our findings suggest that the prior evidence cannot be interpreted causally and that banks' equity stakes are immaterial for their lending.

Keywords: Relationship banking, ownership, monitoring

DOI: https://doi.org/10.17016/IFDP.2016.1183

PDF: Full Paper

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Last Update: June 19, 2020