The Effect of Shareholder Taxes on Bank Risk-Taking: Evidence from S Corporation Banks

Abstract

This study examines the effect of shareholder taxes on bank risk-taking. Economic theory predicts that personal tax rates affect individual risk-taking through risk-sharing with the government via full loss offsets. Exploiting the passive activity loss limitations and detailed ownership data for a sample of S corporation banks, I find that increases in shareholder tax rates are positively (negatively) associated with bank risk-taking when shareholders can (cannot) share in risk with the government through full loss offsets. These relations are driven by banks with few shareholder conflicts and less strict regulators. Overall, the results suggest that investor-level risk-sharing with the government through individual income taxes plays an important role in bank risk-taking.