Making Only America Great? Non-U.S. Market Reactions to U.S. Tax Reform

Fabio B Gaertner,Braden Williams,Jeffrey L Hoopes

doi:10.2139/ssrn.3363006

Abstract

We study the foreign externalities of the recent U.S. tax reform, commonly known as the Tax Cuts and Jobs Act (TCJA). Specifically, we examine foreign firms’ stock returns around key tax reform events. We find significant heterogeneity in market responses by country, industry, and firm. Chinese firms experience large negative returns; especially steel, business equipment, and chemical manufacturers; while the rest of the world experiences positive returns. Firms operating in more differentiated product markets experience positive returns, while firms in financial distress experience negative returns, consistent with the TCJA having competitive repercussions. We also find that firms experiencing decreases in effective tax rates following tax reform experience positive returns. Overall, our results suggest that the TCJA had varied, yet systematic effects on foreign firms’ shareholders’ wealth and the global competitive landscape.

Highlights

We study the foreign externalities of the recent U.S tax reform, commonly known as the Tax Cuts and Jobs Act (TCJA)
Our results suggest that the TCJA had varied, yet systematic effects on foreign firms’ shareholders’ wealth and the global competitive landscape
We find that foreign firms that had an ex post reduction in their effective tax rate, which we use to proxy for foreign firms having a lighter tax burden because of U.S tax reform, had positive returns, consistent with markets pricing the value of U.S tax savings from U.S tax reform for foreign multinationals

Summary

Introduction

We study the foreign externalities of the recent U.S tax reform, commonly known as the Tax Cuts and Jobs Act (TCJA). Foreign firms in most sample countries (i.e., 33 of our 38) experienced positive average stock returns across our event windows. This is consistent with evidence from the European Union (Overesch and Pflitsch 2019). After excluding Chinese firms, we find non-Chinese foreign firms experienced a total positive return of 2.5% across all event windows (about 69% of the respective U.S market response). We contribute by documenting significant heterogeneity in foreign firms’ response to the TCJA and exploring potential reasons for this heterogeneity These findings should be useful in ongoing ex post analysis of the effects of TCJA—especially as certain political candidates are currently promoting additional tax reform as part of their legislative agendas and as foreign trade tensions continue. We contribute to the budding literature on the consequences of the TCJA (Gaertner et al 2018, Koutney and Mills 2018, Carrizosa et al 2019, Chen et al 2019, Hanlon et al 2019, Overesch and Pflitsch 2019)

The TCJA and Foreign Stock Returns

Empirical Analyses

Findings

Conclusion