Nothing Special about an Allowance for Corporate Equity: Evidence from Italian Banks
Dennis Dreusch, Felix Noth, Peter Reichling
Journal of International Money and Finance,
February
2025
Abstract
This paper analyzes the impact of reduced tax incentives for equity financing on banks' regulatory capital ratios under the Basel III regime. We are particularly interested in a recent interest rate cut in the Italian corporate equity allowance, which reduces the relative tax advantage of equity financing. The results show that banks respond to this increased tax disparity by significantly reducing their regulatory capital while at the same time reducing their risk-taking. The decline in capital is more pronounced for small banks and outweighs the initial capital gains from the introduction of this tax instrument. Our results challenge the use of equity allowances, in that financial stability gains persist only as long as costly tax subsidies remain intact and diminish as the size of the subsidy is reduced.
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People
People Doctoral Students PhD Representatives Alumni Supervisors Lecturers Coordinators Doctoral Students Afroza Alam (Supervisor: Reint Gropp ) Julian Andres Diaz Acosta…
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Green Investing, Information Asymmetry, and Capital Structure
Shasha Li, Biao Yang
IWH Discussion Papers,
No. 20,
2023
Abstract
We investigate how optimal attention allocation of green-motivated investors changes information asymmetry in financial markets and thus affects firms‘ financing costs. To guide our empirical analysis, we propose a model where investors with heterogeneous green preferences endogenously allocate limited attention to learn market-level or firm-specific fundamental shocks. We find that a higher fraction of green investors in the market leads to higher aggregate attention to green firms. This reduces the information asymmetry of green firms, leading to higher price informativeness and lower leverage. Moreover, the information asymmetry of brown firms and the market increases with the share of green investors. Therefore, greater green attention is associated with less market efficiency. We provide empirical evidence to support our model predictions using U.S. data. Our paper shows how the growing demand for sustainable investing shifts investors‘ attention and benefits eco-friendly firms.
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Economic Outlook
Joint Economic Forecast Autumn 2024 German economy in transition ‒ weak momentum, low potential growth September 26, 2024 The Joint Economic Forecast Project Group forecasts a…
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Centre for Evidence-based Policy Advice
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The Nasty Gap 30 years after unification: Why East Germany is still 20% poorer than the West Dossier In a nutshell The East German economic convergence process is hardly…
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Research Profiles of the IWH Departments All doctoral students are allocated to one of the four research departments (Financial Markets – Laws, Regulations and Factor Markets –…
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Financial Systems: The Anatomy of the Market Economy How the financial system is constructed, how it works, how to keep it fit and what good a bit of chocolate can do. Dossier In…
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IWH FDI Micro Database
IWH FDI Micro Database The IWH FDI Micro Database (FDI = Foreign Direct Investment) comprises a total population of affiliates of multinational enterprises (MNEs) in selected…
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IWH Industry Survey
IWH Industry Survey From 1993 until the first quarter of 2017, the IWH conducted regular surveys among companies. The results of these surveys could be used to promptly describe…
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