Statutory corporate tax change and the stock market returns: the global experience

ABSTRACT

This study offers a global perspective on the relationship between statutory corporate tax changes and country equity index returns for 54 countries for 2002–2017. Using fixed-effect models for country-effect to account for possible omitted country characteristics, we report higher world-adjusted buy and hold abnormal returns (BHARs) for the country-years with higher corporate tax cuts. Noticeably, we document this outcome for not only the year before the actual tax change but also the year afterwards, indicating that investors might not fully or quickly integrate tax change information. The results hold after excluding the 2008 global financial crisis. Dividing the sample based on market development, we report similar results for emerging and frontier markets, but the tax cut effect becomes insignificant for the one-year window after the tax change in developed markets, indicating a lesser degree of market underreaction.

KEYWORDS:

• Tax reform
• corporate tax rate
• stock returns
• investor underreaction

JEL CLASSIFICATION:

• G12
• G14

Disclosure statement

No potential conflict of interest was reported by the authors.