Arthur José Cunha Bandeira De Mello Joia
Doctorate – Taxes Influence on Bank Leverage and Profit Shifting
Advisor: Prof. Dr. Lucas Ayres Barreira de Campos Barros
Comission: Profs. Drs. Francisco Henrique Figueiredo de Castro Junior, Rafael Felipe Schiozer and Wilson Toshiro Nakamura
Class: 217, FEA-5
How taxes affect corporate financing decisions is an important question in the capital structure literature and a challenging one to address with empirical data due to several endogeneity issues. Although many studies addressed the question, there is still no decisive evidence if tax effects are relevant, as suggested by trade-off theory, or of third order importance as suggested by other theories such as pecking-order and market timing theory. This is especially true for the banking industry, considering that there are still but a few studies including financial institution evidence. Usually regulatory concerns were accepted as dominant in banks’ capital structure decisions; however, recent studies show that this assumption might be incorrect. Harmful tax competition via debt profit shifting is a related subject that has received little attention by former capital structure studies. Profit shifting strategies, such as shifting economic activities, may also be understood as non-debt tax shields. Considering that taxation is due at the individual firm level and banks conglomerates have the profit shifting opportunitiesy to shift profits among groups firms, we shall evaluate if Brazilian banks are able to take advantage of the debt tax shield while accomplishing other capital structure objectives at the conglomerate level. As far as we are concerned, this research is the first to gather empirical evidence of this phenomenon. Recent empirical studies show presented convincing results considering tax policy changes as natural experiments in order to try to resolve the endogeneity problem. In this context, a 11 p.p. tax rate increase applied to Brazilian banks corporate tax rate alongside some features of the country complex and unstable tax environment may provide a unique study opportunity. This dissertation consists of a quantitative empirical research strategy using a difference-in-differences methodological approach.
*Abstract provided by the author