How Do Investors Value the Publication of Tax Information? Evidence From the European Public Country-By-Country Reporting

Abstract

We examine the capital market reaction to the announcement of the European Union (EU) to introduce a public tax country-by-country reporting (CbCR) regime. By employing an event study methodology, we find a significant cumulative average abnormal return (CAAR) of -0.699%, which translates into a monetary value drop of approximately EUR 65 billion. We conclude that investors evaluate reputational risks arising from public scrutiny and competitive disadvantages to outweigh potential benefits of an extended information environment or more sustainable corporate tax strategies. In cross-sectional tests, we find that the average investor reaction is more pronounced for firms with low effective book tax rates, indicating that reputational concerns play a significant role in the marginal investor's investment behavior. Furthermore, our cross-sectional results indicate that the market reaction is stronger for firms operating in industries with high growth in market participants, providing an initial indication for the role of the competitive environment as an additional channel. Our inferences are of particular importance in light of the current ongoing debates on similar disclosure rules (particularly in the United States; cf. Disclosure of Tax Havens and Offshoring Act) as well as for sustainability standard setters.