Market Reaction to the Financial Transaction Tax Adoption in Europe

Abstract

This paper studies the European stock market reactions to a number of events associated with the adoption of a Financial Transaction Tax (FTT). We assess the impact of the FTT implementation process on eight European countries that are involved in the European Union financial transactions tax project. We first analyze the equity market returns to events increasing the probability of an FTT adoption in Europe in order to investigate investors’ perceptions of the FTT externalities. We then assess whether particular firm characteristics explain cross-sectional variations in firms’ return reactions. The results show that events which increase the probability of the tax adoption in Europe are associated with a negative abnormal return for concerned stocks. Moreover, we find that the magnitude of the returns’ reaction was not the same across all the European firms.