Unequal Rewards to Firms: Stock Market Responses to the Trump Election and the 2017 Corporate Tax Reform

Abstract

Massive dollars shuttled back and forth among firms on the twisted path to and passage of the 2017 tax reform. Prices of individual stocks responded to the difference between initial and revised expectations. From the bill’s initiation in the House to final passage, high-tax firms gained significantly, given the dramatic cut from 35% to 21% in the corporate tax rate. Internationally-oriented firms suffered notably, since investors assessed that the surprisingly high repatriation tax outweighed the benefits from territorial taxation. Daily price movements show that the aggregate market responded positively to lower expected taxes.

Keywords: Stock returns, event study, corporate taxes, trade policy, corporate interest payments, post-news drift, election surprise, market efficiency

JEL Classification: G12, G14, H25, O24