Taxation and leverage in international banking

Abstract

This paper explores how corporate taxes affect the capital structure of multinational banks. Guided by a theory of optimal capital structure, it tests whether (i) corporate tax rates induce subsidiary banks to raise leverage in light of traditional debt bias; and (ii) cross-country corporate tax differences affect a subsidiary’s leverage through international debt shifting. Using a novel data set for 756 commercial bank subsidiaries of 91 largest multinational banks in the world, we find that taxes matter significantly through both channels.