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Effects of Disclosing Tax Avoidance: Capital Market Reaction to LuxLeaks

39 Pages Posted: 7 Oct 2016 Last revised: 15 Feb 2017

Birgit Huesecken

University of Cologne

Michael Overesch

Universität zu Köln

Alexander Tassius

University of Cologne

Date Written: February 14, 2017

Abstract

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

Huesecken, Birgit and Overesch, Michael and Tassius, Alexander, Effects of Disclosing Tax Avoidance: Capital Market Reaction to LuxLeaks (February 14, 2017). Available at SSRN: https://ssrn.com/abstract=2848757 or http://dx.doi.org/10.2139/ssrn.2848757

Birgit Huesecken

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Michael Overesch (Contact Author)

Universität zu Köln ( email )

Albertus-Magnus-Platz
WiSo-Gebäude
Cologne, 50923
Germany
0221/470-5605 (Phone)

HOME PAGE: http://www.steuer.uni-koeln.de/

Alexander Tassius

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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