Risk Consequences of Tax-Motivated Choice of Organizational Form in the Banking Industry

We examine the risk consequences of the S-corporation election, a tax-motivated organizational form, on banks’ risk-taking behaviors and extreme adverse outcomes. S-corporations’ single level of taxation increases access to after-tax internal capital and likely enhances S-corporation monitoring efforts. However, S-corporations face strict organizational restrictions on the number and type of allowable shareholders. Given banks’ rigid capital criteria and active regulatory environment, this differential access to external capital is likely to influence S-corporations’ risk-taking behavior. Our evidence suggests that the organizational restrictions necessary to qualify for S-corporation status reduce risk-taking behaviors and limits some extreme adverse outcomes.