Stock price reactions to news about corporate tax avoidance and evasion

Abstract

This study examines stock market responses to news on corporate tax strategies. Our dataset includes 176 tax news items regarding listed German firms over the period from 2003 to 2016. In contrast to previous research, we distinguish between news about corporate tax strategies that are legal (tax avoidance) and illegal (tax evasion). We show that stock market responses differ significantly between news items concerning legal and illegal activities. We find negative abnormal returns for tax evasion news, while we find no general effect for tax avoidance news. Moreover, we do not observe any evidence of average reputation or agency costs exceeding the positive effect of legal tax planning. However, we find positive stock price reactions to legal tax planning when firms’ tax risk is low. Our findings contribute to the ongoing debate among researchers, politicians, and corporate managers on the benefits and costs of corporate tax strategies and address the issue of morals in markets.