Tax Policy Expectations and Investment: Evidence from the 2016 U.S. Election and the Tax Cuts and Jobs Act

63 Pages Posted: 25 Feb 2021 Last revised: 13 Dec 2021

See all articles by John Gallemore

John Gallemore

University of North Carolina Kenan-Flagler Business School

Stephan Hollander

Tilburg University - Tilburg School of Economics and Management

Martin Jacob

WHU - Otto Beisheim School of Management

Xiang Zheng

Norwegian School of Economics (NHH)

Date Written: December 2021

Abstract

We examine how tax policy expectations evolve around and shape firms’ investment response to a change in tax policy. Our study is motivated by Hennessy and Strebulaev (2020), who show analytically that bias arising from unmeasured policy expectations can confound inferences regarding the causal impact of a policy change on investment. Using a text-based approach to measuring firms’ tax policy expectations, we document that two recent tax-changing events—namely, the 2016 U.S. election and the Tax Cuts and Jobs Act (TCJA)—affected these expectations in ways that vary considerably across firms and sometimes contrary to often-used conventional assumptions (e.g., uncertainty over tax policy, on average, is found to increase after the election). As for the TCJA, we observe that these event-induced tax policy expectations materially shape investment both before and in response to its passage. Our findings support the idea that firm-level tax policy expectations can affect investment behavior around a change in tax policy, and suggest a methodology that researchers can use to incorporate these policy expectations into their analysis of tax policy.

Keywords: policy expectations, tax policy, tax reform, investment

JEL Classification: D72, G31, G38, H25

Suggested Citation

Gallemore, John and Hollander, Stephan and Jacob, Martin and Zheng, Xiang, Tax Policy Expectations and Investment: Evidence from the 2016 U.S. Election and the Tax Cuts and Jobs Act (December 2021). Available at SSRN: https://ssrn.com/abstract=3775710 or http://dx.doi.org/10.2139/ssrn.3775710

John Gallemore (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.johngallemore.com

Stephan Hollander

Tilburg University - Tilburg School of Economics and Management ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands
+31 13 466 8288 (Phone)
+31 13 466 8001 (Fax)

HOME PAGE: http://www.uvt.nl/people/s.hollander

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Xiang Zheng

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

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