Asset trade, Real investment and a tilting Financial transaction tax
66 Pages Posted: 2 Mar 2016 Last revised: 8 Oct 2020
Date Written: June 8, 2020
We study the impact of a financial transaction tax (FTT) in a model that combines asset trade and real investment. An informed trader holds private information about the fundamental value of a firm and the firm's manager relies on the asset price to infer such information and invest accordingly. We show that an FTT inefficiently reduces trading in the financial market, however it may tilt the market equilibrium and make asset prices more informative. We characterize when each of these two effects prevails. The model also helps reconciling empirical evidence on the adoption of the FTT.
Keywords: Financial transaction tax, market trading, asset price informativeness, investment
JEL Classification: G12, G14, G18, G31
Suggested Citation: Suggested Citation