Effects of Disclosing Tax Avoidance: Capital Market Reaction to LuxLeaks
39 Pages Posted: 7 Oct 2016 Last revised: 15 Feb 2017
Date Written: February 14, 2017
This study analyzes the capital market reaction to news about tax avoidance. As tax information is usually not published, little is known about the effects of disclosing tax avoidance. However, in the course of the event known as LuxLeaks, hundreds of tax documents were released. Unlike other events used in previous literature, the litigation risk, which is generally associated with tax avoidance, is considerably lower because these documents consist of advance tax rulings. Using an event study methodology, we find significant positive cumulated abnormal returns for the involved firms. Our results show that market participants reward the disclosure of tax avoidance and cast doubts on significant reputational effects. Further analysis suggests that the capital market especially rewards news about a firm’s additional engagement in tax avoidance that is associated with a low risk of litigation.
Keywords: Market Reaction, Tax Avoidance, Disclosure, Litigation Risk, Reputational Costs
JEL Classification: G14, G32, H26
Suggested Citation: Suggested Citation