Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom

56 Pages Posted: 16 Jun 2021

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Sascha Mierzwa

University of Marburg - School of Business & Economics

Date Written: June 14, 2021

Abstract

We study the effect of tax policy on stock market returns in the United States, Germany, and the United Kingdom using GARCH models and a unique daily dataset of legislative tax changes during the period 1978 to 2018. We find that days of discretionary tax legislation during all stages of the process often matter for returns, both in terms of statistical significance as well as economic relevance. Further disaggregating the tax shocks shows that news about personal income tax cuts affects stock market returns positively, whereas business tax legislation is rarely influential. We find evidence of stock market spillovers, mainly from US tax changes to European stock markets. In several cases, we measure significant effects of changes in tax legislation on the days the changes are implemented. The US House Committee Report appears to be the most influential legisla-tive stage. During the financial crisis, stock markets were more responsive to tax legislation. Finally, S&P500 returns tend to react at earlier legislative stages than do DAX returns, whereas FT30 returns barely react on days of domestic legislative action.

Keywords: Fiscal policy, legislative tax changes, stock markets, income tax, business tax, indirect tax, Germany, United Kingdom, United States

JEL Classification: E62, F65, G18, H24, H25

Suggested Citation

Hayo, Bernd and Mierzwa, Sascha, Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom (June 14, 2021). Available at SSRN: https://ssrn.com/abstract=3866716 or http://dx.doi.org/10.2139/ssrn.3866716

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
Germany
++49(0)6421-28-23091 (Phone)
++49(0)6421-28-23193 (Fax)

Sascha Mierzwa

University of Marburg - School of Business & Economics ( email )

Universitätsstrasse 24
D-35032 Marburg, D-35032
Germany

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