Taxing the Digital Economy: Investor Reaction to the European Commission’s Digital Tax Proposals

Abstract

This study analyzes investor reaction to the European Commission’s proposals on the taxation of digital firms. Examining the stock returns of potentially affected firms surrounding the proposals’ release, we find a significant abnormal capital market reaction of −0.692 percent. This corresponds to an absolute market value reduction of more than 52 billion euros, 40 percent of which is attributable to US firms. Investor reaction is stronger for firms that engage more in tax avoidance and for those with higher European Union exposure. Overall, investors perceive the event as a threat to digital firms’ future profitability and react in line with the proposals’ intentions to secure tax revenues and to extract location-specific rent.