Information Content and Consensus Effect of Government Fiscal Plans

Abstract

While fiscal plans are expected to provide timely information about planned fiscal budgets, little is known about their value to investors. This paper examines how governments’ fiscal plans can enrich equity investors’ information set and induce consensus about the future fiscal outlook. We exploit the mandatory disclosure introduced in the Stability and Growth Pact (SGP) that requires European Union (EU) governments to publish multi-annual fiscal plans. We find that while fiscal plans are informative, investors interpret their content differently. Also, we draw on the literature on fiscal multipliers to explore the mechanisms that drive these effects. We document that procyclical fiscal plans that consist of spending cuts during economic downturns generate substantial interest in stock markets, but they also cause strong opinion divergence among investors. These results are consistent with recent evidence on the contractionary effects of procyclical spending cuts and the uncertainty surrounding fiscal multipliers. Collectively, the findings suggest how fiscal plans can be informative for financial markets. However, their value depends on specific features of planned fiscal policy actions (e.g., sign, composition, and timing).