Essays on Stock Market Reactions to Corporate Tax Reforms and Tax Avoidance
This cumulative dissertation examines stock market reactions to corporate tax reforms and tax avoidance. The first essay analyzes investor responses to a tax reform announcement in the United Kingdom that included a substantial corporation tax hike to consolidate the budget in the recovery phase after the COVID-19 pandemic. The results indicate that governments face tradeoffs in stabilizing the economy, as companies severely affected by preceding crises benefit from assured government support, while the tax rate hike penalizes more dynamic companies, thus jeopardizing future growth. However, in the presence of macro-financial risk due to excessive public debt, regaining fiscal stability becomes crucial from an investor’s perspective, even if it involves tax increases. The second essay provides a comprehensive review of the strongly growing strand of literature on the valuation of tax-related events by stock market investors. It traces the evidence from early insights on the value relevance of corporate taxes to key learnings about the relevance of tax drivers beyond the tax rate up to major tax events of the more recent past, which are centered around the stock price implications of tax avoidance, the restriction of tax planning leeway, fundamental reforms intended to ensure fairer taxation, and unilateral tax reforms aimed at increasing competitiveness or fiscal adjustment. The third essay investigates the stock market reaction to a German tax reform that was aimed at stimulating growth through tax relief and relied on targeted tax incentives. The results show that investors generally assess the tax relief provided positively, but do not expect it to be substantial enough to considerably improve the economic position of German firms. The stock market reaction to the final approval of the act further confirms that investors do not expect any strong growth impetus from the tax incentives introduced.
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