Capital Market Reaction to Tax Avoidance: Evidence from Luxleaks

Abstract

This study analyzes the capital market reaction to news about tax avoidance. We study the event known as LuxLeaks, through which hundreds of advance tax rulings were released on November 5, 2014. Advance tax rulings provide tax certainty. Consequently, the LuxLeaks revelation was not associated with any penalties or back taxes and we can isolate reputational loss as the only potential reason for a negative market response. Using an event study methodology, we find significant positive cumulated abnormal returns for the involved firms. Our results show that market participants reward this specific disclosure of tax avoidance and cast doubts on significant reputational effects. Further analysis suggests that the capital market especially rewards news about a firm’s additional engagement in tax avoidance that is associated with a high level of certainty.