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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Banks' Equity Stakes and Lending : Evidence from a Tax Reform
Bastian von Beschwitz
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.


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Bastian von Beschwitz & Daniel Foos, Banks' Equity Stakes and Lending : Evidence from a Tax Reform, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1183, Oct 2016.
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Keywords: Relationship banking ; Ownership ; Monitoring
DOI: 10.17016/IFDP.2016.1183
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