A Reexamination of Investors’ Reaction to Tax Shelter News: Evidence from the Luxembourg Tax Leaks

52 Pages Posted: 6 Mar 2017 Last revised: 29 Jan 2023

See all articles by Wayne L. Nesbitt

Wayne L. Nesbitt

Michigan State University, Eli Broad College of Business

Edmund Outslay

Michigan State University - Department of Accounting & Information Systems

Anh Persson

University of Illinois at Urbana-Champaign - Gies College of Business - Department of Accountancy

Date Written: July 31, 2022

Abstract

This study examines the stock market reaction to the unprecedented leaks of confidential advance tax rulings between Luxembourg and multinational corporations—also known as the “LuxLeaks.” Contrary to the negative market reaction to tax shelter news documented in prior research, we find that investors responded positively to these leaks. This reaction is concentrated among U.S. firms. Furthermore, we document a positive association between abnormal returns and the reduction in firms’ tax uncertainty, consistent with a downward revision in investors’ perception of the tax uncertainty associated with the firms’ Luxembourg operations. We also investigate other firm characteristics and find that, among U.S. firms, investors’ reaction is weaker for those over-invested in tax avoidance. Among non-U.S. firms, the market response is muted by concerns about the quality of governance. In summary, our results suggest that investors’ reaction to tax shelter news is conditional on their reassessment of the firms’ tax uncertainty.

Keywords: Luxembourg Tax Leaks, Tax Risk, Tax Avoidance, Event Study

JEL Classification: H25, G30

Suggested Citation

Nesbitt, Wayne L. and Outslay, Edmund and Persson, Anh, A Reexamination of Investors’ Reaction to Tax Shelter News: Evidence from the Luxembourg Tax Leaks (July 31, 2022). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2901143 or http://dx.doi.org/10.2139/ssrn.2901143

Wayne L. Nesbitt

Michigan State University, Eli Broad College of Business ( email )

North Business College Complex
632 Bogue Street N261
East Lansing, MI 48824-1034
United States
517-432-4407 (Phone)
517-432-1101 (Fax)

Edmund Outslay

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
(517) 432-2912 (Phone)

Anh Persson (Contact Author)

University of Illinois at Urbana-Champaign - Gies College of Business - Department of Accountancy ( email )

291 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217.330.8543 (Phone)

HOME PAGE: http://https://giesbusiness.illinois.edu/profile/anh-vuong-persson

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