Asset trade, Real investment and a tilting Financial transaction tax

Tobias Dieler, Sonny Biswas, Giacomo Calzolari, Fabio Castiglionesi (2022) Asset Trade, Real Investment, and a Tilting Financial Transaction Tax. Management Science (accepted).

67 Pages Posted: 2 Mar 2016 Last revised: 21 Nov 2022

See all articles by Tobias Dieler

Tobias Dieler

University of Bristol - Department of Finance and Accounting

Swarnava Biswas

University of Bristol

Giacomo Calzolari

European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR); University of Bologna

Fabio Castiglionesi

Tilburg University - Department of Finance

Date Written: January 24, 2022

Abstract

We study the impact of a Financial Transaction Tax (FTT) in a model that combines asset trading 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 characterize an informative, but illiquid, equilibrium where the firm’s value is optimal but trade is inefficiently low, together with an uninformative equilibrium with maximal liquidity but inefficient firm value. Although an FTT inefficiently reduces trading, it may tilt the market’s equilibrium and make asset prices more informative. We characterize the situations in which one or the other of these two effects prevails. The analysis also helps us to reconcile some puzzling empirical evidence regarding the adoption of the FTT.

Keywords: Financial transaction tax, market trading, asset price informativeness, real investment

JEL Classification: G12, G14, G18, G31

Suggested Citation

Dieler, Tobias and Biswas, Swarnava and Calzolari, Giacomo and Castiglionesi, Fabio, Asset trade, Real investment and a tilting Financial transaction tax (January 24, 2022). Tobias Dieler, Sonny Biswas, Giacomo Calzolari, Fabio Castiglionesi (2022) Asset Trade, Real Investment, and a Tilting Financial Transaction Tax. Management Science (accepted)., Available at SSRN: https://ssrn.com/abstract=2739357 or http://dx.doi.org/10.2139/ssrn.2739357

Tobias Dieler (Contact Author)

University of Bristol - Department of Finance and Accounting ( email )

Tyndalls Park Road 15-19
Bristol, BS8 1PY
United Kingdom

HOME PAGE: http://sites.google.com/site/tobiasdieler/

Swarnava Biswas

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, Avon BS8 ITH
United Kingdom

Giacomo Calzolari

European University Institute - Economics Department (ECO) ( email )

Villa la Fonte
Via delle fontanelle 18
San Domenico di Fiesole, Florence 50014
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Bologna ( email )

Piazza Scaravilli 2
I-40126 Bologna
Italy

HOME PAGE: http://sites.google.com/view/giacomo-calzolari

Fabio Castiglionesi

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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