Effects of Disclosing Tax Avoidance: Capital Market Reaction to LuxLeaks
51 Pages Posted: 7 Oct 2016 Last revised: 4 Mar 2018
Date Written: February 28, 2018
This study analyzes the capital market reaction to news about tax avoidance. Because 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 studies, 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 evidence for significant positive cumulated abnormal returns for the involved firms. Further analyses suggest that the capital market particularly rewards additional tax disclosure if a firm is in the extreme tails of the ETR distribution. Our analysis, however, reveals insignificant market responses to the tax disclosure for large firms and firms with high media coverage, which suggests that there are larger reputational effects if firms are more exposed to public attention.
Keywords: Market Reaction, Tax Avoidance, Disclosure, Litigation Risk, Reputational Costs
JEL Classification: G14, G32, H26
Suggested Citation: Suggested Citation