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

49 Pages Posted: 17 Mar 2021

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Murat Alp Celik

University of Toronto - Department of Economics

Xu Tian

University of Toronto

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: March 17, 2021

Abstract

We develop a method for estimating the stock market impact of aggregate events. Based on using data on both stock and options prices, our technique accounts for two important sources of bias present in traditional methods. First, our method takes into account market anticipation, without the need for information on specific firm characteristics. Many event studies only measure a fraction of an event's full value effect, so the measured market reaction at event resolution can be misleading, particularly in the case of a very high degree of market anticipation. Second, our method is robust to the possibility of the event being good news for some firms and bad for others, without prior specification of this heterogeneity.

We apply the method to the passage of the Tax Cuts and Jobs Act (TCJA), which exhibits both anticipation and heterogeneity. We estimate the market anticipated the probability of passage to be as high as 95% 30 days before the event. The full value impact of the TCJA is found to be 12.36%, compared to 0.68% when market anticipation is ignored. The firm-level impact of the TCJA is considerably heterogeneous, with large and innovative firms with high growth prospects being the largest winners.

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

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

Suggested Citation

Borochin, Paul and Celik, Murat Alp and Tian, Xu and Whited, Toni M., Identifying the Heterogeneous Impact of Highly Anticipated Events: Evidence from the Tax Cuts and Jobs Act (March 17, 2021). Available at SSRN: https://ssrn.com/abstract=3806560 or http://dx.doi.org/10.2139/ssrn.3806560

Paul Borochin

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Murat Alp Celik

University of Toronto - Department of Economics ( email )

150 St. George St.
Toronto, ON M5S 3G7
Canada

HOME PAGE: http://muratcelik.faculty.economics.utoronto.ca/

Xu Tian

University of Toronto ( email )

150 St George Street
Toronto, Ontario M5S 3G7
Canada
647-606-0709 (Phone)

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

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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