Market and Firm Reaction to Targeted Tax Benefits: Evidence From the Tax Reform Act of 1986

47 Pages Posted: 1 Jul 2018 Last revised: 15 May 2020

See all articles by Jennifer Luchs-Nunez

Jennifer Luchs-Nunez

University of Connecticut - Department of Accounting

George A. Plesko

University of Connecticut School of Business

Steven Utke

University of Connecticut - Department of Accounting

Date Written: May 14, 2020

Abstract

A growing body of work examines market and firm responses to specific tax benefits. We extend this literature by examining market and firm reactions to an economically significant targeted tax refund granted to a few large, but poorly performing, steel firms by the Tax Reform Act of 1986 (TRA86). We find, relative to steel firms not receiving the refund, qualifying firms experience either a negative or no significant market reaction around each of three key dates in the TRA86 legislative process. Using difference-in-differences analyses to test a variety of refund uses, we find that refund recipients use the proceeds to pay down debt rather than to increase capital assets, payouts to shareholders, acquisitions, or employment. Overall, we find targeted tax benefits granted to significant but struggling firms, while potentially politically appealing, appear to generate limited economic benefits.

Keywords: Rifle-Shot Provision, Tax Policy, Tax Reform Act of 1986, Corporate Tax

JEL Classification: H25

Suggested Citation

Luchs-Nunez, Jennifer and Plesko, George A. and Utke, Steven, Market and Firm Reaction to Targeted Tax Benefits: Evidence From the Tax Reform Act of 1986 (May 14, 2020). University of Connecticut School of Business Research Paper No. 18-24, Available at SSRN: https://ssrn.com/abstract=3198371 or http://dx.doi.org/10.2139/ssrn.3198371

Jennifer Luchs-Nunez (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

George A. Plesko

University of Connecticut School of Business ( email )

School of Business
Storrs, CT 06269-2041
United States
860-486-6421 (Phone)

Steven Utke

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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