Abstract
We employ an event study methodology to investigate the stock price reaction around the day of the political decision to include a country-by-country reporting obligation for EU financial institutions. We do not find significant abnormal returns for the banks affected. Sample splits according to the effective tax rate and the degree of B2C orientation do not reveal a more pronounced negative investor response for banks engaging more strongly in tax avoidance or being potentially more concerned about reputational risks, respectively. We conclude that the implementation of a CbCR requirement for EU financial institutions did not trigger a noticeable investor response. Contrary prior findings regarding other public tax disclosure obligations might be driven by the distinct motivation of the rules and the way the information is presented. We contend that capital market reactions to an upcoming increase in tax transparency are not generalizable to other industries and settings, but that consideration must be given to the context and the exact design of the rule.
Highlights
A couple of recent studies suggest that investors perceive a mandatory increase in tax transparency as a potent tool in curbing tax avoidance
We aim to investigate whether the negative investor reactions documented in their studies are generalizable to other industries and settings, namely to the introduction of a public country-by-country reporting (CbCR) requirement for EU financial institutions
The CbCR data of EU financial institutions have to be published by the companies themselves, either as a separate document or within the annual report
Summary
A couple of recent studies suggest that investors perceive a mandatory increase in tax transparency as a potent tool in curbing tax avoidance. Johannesen & Larsen (2016), Chen (2017) and Hoopes et al (2018) document negative stock price reactions around key dates of two legislative procedures that introduced new public tax disclosure obligations for certain companies They interpret their findings as evidence of investors expecting the disclosure of new information to be costly for firms, mainly due to an anticipated increase in scrutiny by the public and by tax authorities, resulting in a potential reduction of profit shifting opportunities under the new disclosure rules. Since the tax planning strategies of large multinational firms have moved into the focus of public and political attention, several initiatives of the EU and the OECD have discussed potential measures to limit extensive profit shifting activities One of these action points aims at improving tax transparency, in particular by mandating companies to disclose a CbCR which contains certain tax-related information on a per-country basis. Due to the unpredicted nature of the decision in the trilogue on 27 February 2013, we expect to observe an investor reaction around this date
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
