Increasing Tax Transparency: Investor Reactions to the Country-by-Country Reporting Requirement for EU Financial Institutions

37 Pages Posted: 20 Apr 2018

See all articles by Verena K. Dutt

Verena K. Dutt

Centre for European Economic Research (ZEW)

Christopher Ludwig

University of Mannheim; ZEW – Leibniz Centre for European Economic Research

Katharina Nicolay

ZEW – Leibniz Centre for European Economic Research

Heiko Vay

University of Mannheim

Johannes Voget

University of Mannheim - Accounting and Taxation

Date Written: 2018

Abstract

We employ an event study methodology to investigate the stock price reaction around the day of the political decision to include a country-by-country reporting obligation for EU financial institutions. We do not find significant abnormal returns for the banks affected. Sample splits according to the effective tax rate and the degree of B2C orientation do not reveal a more pronounced negative investor response for banks engaging more strongly in tax avoidance or being potentially more concerned about reputational risks, respectively. We conclude that the implementation of a CbCR requirement for EU financial institutions did not trigger a noticeable investor response. Contrary prior findings regarding other public tax disclosure obligations might be driven by the distinct motivation of the rules and the way the information is presented. We contend that capital market reactions to an upcoming increase in tax transparency are not generalizable to other industries and settings, but that consideration must be given to the context and the exact design of the rule.

Keywords: Tax Avoidance, Profit Shifting, Country-by-Country Reporting, Financial Institutions, Market Reaction

JEL Classification: H25, H26, G21, G28

Suggested Citation

Dutt, Verena Katharina and Ludwig, Christopher and Nicolay, Katharina and Vay, Heiko and Voget, Johannes, Increasing Tax Transparency: Investor Reactions to the Country-by-Country Reporting Requirement for EU Financial Institutions (2018). ZEW - Centre for European Economic Research Discussion Paper No. 18-019, Available at SSRN: https://ssrn.com/abstract=3165410 or http://dx.doi.org/10.2139/ssrn.3165410

Verena Katharina Dutt (Contact Author)

Centre for European Economic Research (ZEW) ( email )

L7, 1
Mannheim, 68161
Germany

Christopher Ludwig

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Katharina Nicolay

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Heiko Vay

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Johannes Voget

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

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