Don't Go on Holiday in August! Market Reaction to an Unexpected Windfall Tax on Banks

Abstract

Using an event study approach, this paper investigates the stock market reaction to the unexpected announcement of a windfall tax on banks’ extra profits. We show that investors negatively perceive the introduction of the tax, with more pronounced reactions for banks expected to be more highly burdened. This evidence is corroborated when we investigate the cross-sectional determinants of banks’ returns and cumulative abnormal returns. Overall, the results suggest that investors negatively price excess profits taxes and contribute to our understanding of how stock markets respond to tax policy changes.

Keywords: G14, G21, H22, H25, H26, M41