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

102 Pages Posted: 25 Feb 2021 Last revised: 24 Dec 2022

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 2022

Abstract

We examine how firms’ tax policy expectations (TPE) evolve around and affect their investment response to a change in tax policy. This examination is motivated, in part, by Hennessy and Strebulaev (2020), who show analytically the importance of accounting for policy expectations in empirical tests purporting to capture the causal impact of a policy change. Using a text-based approach to measuring TPE, we document that two tax-changing events—namely, the 2016 U.S. election and the Tax Cuts and Jobs Act (TCJA)—spawned considerable within-industry and within-year variation in TPE, sometimes going against often-used conventional assumptions in prior research. Furthermore, we observe that event-induced TPE materially affects investment both before and in response to the TCJA’s passage in 2017, with its first and second moments having offsetting effects. Finally, we find that domestic firms differ from multinational firms in their investment response to TPE, with the former (latter) more likely to adjust the level (shift the country location) of their investment. Overall, our findings strongly support the idea that TPE can affect investment behavior around a tax policy change, and suggest that our methodology can be used by future research to study and incorporate TPE into their analysis of tax policy effects.

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 2022). 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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