Investor Valuations of Japan's Adoption of a Territorial Tax Regime: Quantifying the Direct and Competitive Effects of International Tax Reform

Abstract

This paper examines the impact of Japan’s 2009 adoption of a territorial tax regime using event study methods which leverage individual firm characteristics to identify underlying drivers of market reactions. Differences in Japanese firms’ foreign and domestic effective tax rates yield an aggregate capitalization effect of ¥4.3 trillion, while firms with less foreign exposure and fewer opportunities for tax avoidance experienced relatively larger abnormal returns. We attribute these results to direct tax savings on existing undistributed foreign earnings, enhanced opportunities for international expansion, and cultural biases against tax planning. Spillovers to the U.S. (through tax or firm competition) appear insignificant.

Keywords: international tax reform, Japanese dividend exemption, territorial taxation, multinational tax avoidance, tax competition, event study

JEL Classification: H25, H32, F23, K34, H26