Tax Expense Surprise and Emerging Markets Equity Returns

Borsa Istanbul Review, forthcoming

47 Pages Posted: 8 Jan 2021 Last revised: 1 Feb 2022

Date Written: November 14, 2020


This study investigates the relationship between tax expense surprise and expected equity returns in emerging markets. Using a broad sample of equities from 27 emerging countries, we find a strong positive link between tax expense surprise and the cross-sectional expected stock returns. Univariate portfolio analyses of the overall sample show that equities in the highest tax expense surprise quintile earn 9.48% higher risk-adjusted annual returns than equities in the lowest tax expense surprise quintile. This relationship remains robust to alternative definitions of tax expense surprise, even after controlling for other anomalies related to financial and tax variables in a regression framework. We also examine whether tax enforcement enhances the value relevance of tax expense surprise. The findings show that tax expense surprise is related to expected equity returns only when tax enforcement is high. Thus, tax enforcement plays a significant role in the value relevance of tax expense shocks.

Keywords: tax expense surprise, tax expense momentum, cross-sectional equity returns, emerging markets, international finance

JEL Classification: G10, G11, G12

Suggested Citation

Gunaydin, A. Doruk, Tax Expense Surprise and Emerging Markets Equity Returns (November 14, 2020). Borsa Istanbul Review, forthcoming, Available at SSRN: or

A. Doruk Gunaydin (Contact Author)

Sabanci University ( email )

School of Management
Orhanli Tuzla
İstanbul, 34956

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