Tax Policy Uncertainty and Stock Return Volatility

62 Pages Posted: 2 Nov 2013 Last revised: 26 Jan 2017

See all articles by Jennifer L. Brown

Jennifer L. Brown

Arizona State University (ASU) - W.P. Carey School of Business

KC Lin

Central Michigan University - College of Business Administration

Jared A. Moore

Oregon State University - College of Business

Laura Wellman

Pennsylvania State University

Date Written: January 20, 2017

Abstract

This study finds that stock return volatility is higher during periods of high tax policy uncertainty (TPU), even after controlling for other sources of general macroeconomic uncertainty. Further, we find that the relation between TPU and stock return volatility is more pronounced where firms are characterized by greater variability in tax outcomes. We adopt a broad definition of TPU that encompasses both the legislative and regulatory processes, and we perform tests to validate a news-based measure of TPU that is consistent with this definition. In supplemental tests, we document an increase in analyst forecast dispersion during periods of high TPU, indicating the effects of tax policy uncertainty extend to sophisticated market participants. We also document that the effects of TPU are concentrated in systematic volatility. Overall our results suggest that uncertainty surrounding tax policy can impose real costs on investors.

Keywords: tax policy uncertainty, economic policy uncertainty, return volatility

JEL Classification: H25, H32, G18, M41, D72, G12

Suggested Citation

Brown, Jennifer L. and Lin, KC and Moore, Jared A. and Wellman, Laura, Tax Policy Uncertainty and Stock Return Volatility (January 20, 2017). Available at SSRN: https://ssrn.com/abstract=2348414 or http://dx.doi.org/10.2139/ssrn.2348414

Jennifer L. Brown

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States
(480)965-6618 (Phone)
(480) 965-8392 (Fax)

KC Lin

Central Michigan University - College of Business Administration ( email )

Mt. Pleasant, MI 48858
United States

Jared A. Moore (Contact Author)

Oregon State University - College of Business ( email )

443 Austin Hall
Corvallis, OR 97331
United States
541-737-2517 (Phone)
541-737-4890 (Fax)

Laura Wellman

Pennsylvania State University ( email )

378 Business Building
University Park, PA 16802
United States
6026225683 (Phone)

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