Does market react to tax reduction news? An empirical study on corporate tax reduction of Bangladesh in 2017-18
Abstract
Purpose – This study tries to investigate the capital market reaction to the corporate tax reduction announcement (37.5% from 40%) in Bangladesh for publicly listed Banking, Insurance and Financial Institutions of 2017-18.
Methodology – This study applied an event study approach to identify any significant average abnormal returns as well as cumulative average abnormal returns of all the publicly listed Banks, Insurances and Financial institutions around the announcement period.
Findings – Insignificant average abnormal return (AAR) experienced in case of Banking and Insurance industry on event day, except the financial institutions which have generated a statistically significant abnormal negative return on announcement day. The combined AAR of all three sectors has also generated statistically insignificant return around event windows which suggest that investors did not consider tax reduction news as valuable information for investment decision nor considering it as an essential factor of share value.
Limitation – The study did not consider any possible extraneous variable that could result in insignificant reactions.
Practical Implication – The findings of this research would considerably contribute to the financial and economic policy formulation while taken into consideration the possible impact of the policy over the capital market of Bangladesh.
Originality – This study makes a considerable input to the research in the area of taxes linked to the behavioural finance applying the unique variable of investor’s reactions.
Keyword : tax reduction, corporate income tax, capital market, event study, abnormal return, cumulative abnormal return
How to Cite
Adnan, A. (2019). Does market react to tax reduction news? An empirical study on corporate tax reduction of Bangladesh in 2017-18. Business, Management and Economics Engineering, 17(2), 286-308. https://doi.org/10.3846/bme.2019.11274
This work is licensed under a Creative Commons Attribution 4.0 International License.
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Brooks, C., Godfrey, C., Hillenbrand, C., & Money, K. (2016). Do investors care about corporate taxes? Journal of Corporate Finance, 38, 218-248. https://doi.org/10.1016/j.jcorpfin.2016.01.013
Brown, J. R., Liang, N., & Weisbenner, S. J. (2004). Executive financial incentives and payout policy: Firm responses to the 2003 dividend tax cut (NBER Working Paper No. 11002). National Bureau of Economic Research. https://doi.org/10.3386/w11002
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Charoenrook, A. (2005). Does sentiment matter (Unpublished working paper). Vanderbilt University.
Chetty, R., & Saez, E. (2005). Dividend taxes and corporate behavior: Evidence from the 2003 dividend tax cut. The Quarterly Journal of Economics, 120(3), 791-833. https://doi.org/10.1093/qje/120.3.791
Collins, J. H., & Kemsley, D. (2000). Capital gains and dividend taxes in firm valuation: evidence of triple taxation. The Accounting Review, 75(4), 405-427. https://doi.org/10.2308/accr.2000.75.4.405
Cutler, D. M. (1988). Tax reform and the stock market: An asset price approach. The American Economic Review, 78(5), 1107-1117.
Cutler, D. M., Poterba, J. M., & Summers, L. H. (1988). What moves stock prices? (NBER Working Paper No. 2538). National Bureau of Economic Research.
Da, Z., Engelberg, J., & Gao, P. (2014). The sum of all FEARS investor sentiment and asset prices. The Review of Financial Studies, 28(1), 1-32. https://doi.org/10.1093/rfs/hhu072
Dhaliwal, D., Li, O. Z., & Trezevant, R. (2003). Is a dividend tax penalty incorporated into the return on a firm’s common stock? Journal of Accounting and Economics, 35(2), 155-178. https://doi.org/10.1016/S0165-4101(03)00017-X
Dissanaike, G. (1994). On the computation of returns in tests of the stock market overreaction hypothesis. Journal of Banking & Finance, 18(6), 1083-1094. https://doi.org/10.1016/0378-4266(94)00061-1
Downs, T. W., & Tehranian, H. (1988). Predicting stock price responses to tax policy changes. The American Economic Review, 78(5), 1118-1130.
Edwards, C. H., Lang, M. H., Maydew, E. L., & Shackelford, D. A. (2004). Germany’s repeal of the corporate capital gains tax: The equity market response. Journal of the American Taxation Association, 26(s-1), 73-97. https://doi.org/10.2308/jata.2004.26.s-1.73
Elton, E. J., & Gruber, M. J. (1970). Marginal stockholder tax rates and the clientele effect. The Review of Economics and Statistics, 52(1), 68-74. https://doi.org/10.2307/1927599
Elton, E. J., Gruber, M. J., & Rentzler, J. (1984). The ex-dividend day behavior of stock prices; A reexamination of the clientele effect: A comment. The Journal of Finance, 39(2), 551-556. https://doi.org/10.1111/j.1540-6261.1984.tb02328.x
Forster, K. (2005). Stock prices and real economic activity empirical results for Germany (Working paper). Research Notes, Deutsche Bank Research.
Gadarowski, C., Meric, G., Welsh, C., & Meric, I. (2007). Dividend tax cut and security prices: Examining the effect of the Jobs and Growth Tax Relief Reconciliation Act of 2003. Financial Management, 36(4), 89-106.
Gallemore, J., Maydew, E. L., & Thornock, J. R. (2014). The reputational costs of tax avoidance. Contemporary Accounting Research, 31(4), 1103-1133. https://doi.org/10.1111/1911-3846.12055
Getry, W. M., Kemsley, D., & Mayer, C. J. (2003). Dividend taxes and share prices: evidence from real estate investment trusts. The Journal of Finance, 58(1), 261-282. https://doi.org/10.1111/1540-6261.00524
Giaccotto, C., & Sfiridis, J. M. (1996). Hypothesis testing in event studies: The case of variance changes. Journal of Economics and Business, 48(4), 349-370. https://doi.org/10.1016/0148-6195(96)00019-7
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