Identifying the Heterogeneous Impact of Highly Anticipated Events: Evidence from the Tax Cuts and Jobs Act

Abstract

We develop a method for estimating individual firm heterogeneity in the stock market impact of aggregate events, using data on both stock and options prices. Our method impounds the effects of event anticipation. We apply the method to the passage of the Tax Cuts and Jobs Act (TCJA), which exhibits both anticipation and heterogeneity. We estimate that the market anticipated the probability of passage to be 95% 30 days before the event. The full value impact of the TCJA is 12.36%, compared to 0.68% when market anticipation is ignored. Large, innovative firms with high growth prospects are the largest winners.

Keywords: Event Study, Market Anticipation, Options, Tax Policy, Innovation

JEL Classification: G13, G14, G18, H25, O34