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Back on the balance sheet: The tax effects of contingent claims in commercial banking
Author(s) -
Reagle Derrick
Publication year - 2005
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2005.01.002
Subject(s) - taxable income , leverage (statistics) , balance sheet , economics , monetary economics , contingent liability , revenue , off balance sheet , income tax , balance (ability) , business , finance , accounting , debt , public economics , medicine , machine learning , computer science , physical medicine and rehabilitation
Contingent claims separate revenue and cost into two different time periods. Revenue comes in the initial origination process, while the cost comes upon completion of the contract in the event of default. With banks increasing contingent claims in recent years, a higher taxable income leads to a shift in a bank's balance sheet toward tax‐free income and tax‐shielding liabilities. This provides a valuable case‐study of corporate finance theories of tax management. This paper builds a model to illustrate the income features of contingent claims. Call Reports from 1990–1996 are examined, and show significant evidence of increases in leverage associated with contingent claims.