Market Reactions to the Announcement of China’s Resource Tax Law

ABSTRACT

This study employs event study methodology to examine the impacts of China’s Resource Tax Law on corporate firms, from the perspective of stock traders. Our results demonstrate that most sectors experience negative market reactions from 41 to 121 trading days around the announcement rather than immediately. Regarding the determinants of market reactions, we find that research and development (R&D) investments are positively related to cumulative abnormal returns. Moreover, our additional tests show that R&D investments have different impacts on various subsamples. Further, the empirical results remain robust when controlling for potential endogeneity issues.

KEYWORDS:

• Resource Tax Law
• market reactions
• event study methodology
• research and development
• stock markets

JEL:

• G14
• G18
• G34
• Q58

Highlights

• Examining the market reactions on the announcements of the Chinese RTL.

• Most sectors negatively react to the RTL from 41 to 121 trading days.

• Firms with higher R&D investments tend to experience better market reactions.

• Ownership structure and fundamentals also significantly affect market reactions.

• Different impacts of R&D investments are detected among various sub-samples.

Acknowledgments

The authors also wish to thank all the scholars and friends who offer comments and support for this research.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary Material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2022.2089017

Notes

1. For brevity, we report correlations among our main variables in Table A in the online Supplementary Material. The correlations among these variables are generally small, with the only exceptions being those between our dependent variables. However, the dependent variables were tested with separate regressions. Thus, we conclude that collinearity is at an acceptable level.

2. Being unstable means that they fluctuate between positive and negative (Manufacture, Wholesale, and Retailing), as well as between significant and insignificant (Mining, Construction, Transportation, Catering, Information Technology, Press and Publication).

3. For robustness, we also adopted the capital asset pricing model (CAPM) to calculate CARs and reinvestigate the determinants of market reactions to the RTL. For brevity, the empirical results are reported in Table B in the online Supplementary Material.

4. We also added another subsample test by dividing our sample firms into three main sectors: the primary (Agriculture), secondary (Manufacture), and tertiary sectors (Service). For brevity, we report the empirical results in Table C in the online Supplementary Material.

Additional information

Funding

This work was supported by the National Social Science Fund of China [grant number [19CJY022];