The effects of tax policy on financial markets: G3 evidence

K Peren Arin (), Abdullah Mamun and Nanda Purushothman

Review of Financial Economics, 2009, vol. 18, issue 1, pages 33-46

Abstract: We investigate the effects of various tax policy innovations on stock market returns. By using a vector autoregressive model that controls for the mutual causality between fiscal policy and financial market performance, we test whether financial markets serve as a transmission mechanism for tax policy innovations. Our findings indicate that indirect taxes have a larger effect on market returns than do labor taxes. Further, corporate tax innovations do not have any statistically significant effect on stock returns. We consider that this finding is a result of a firm's ability to switch between equity financing and bond financing.

Keywords: Fiscal; policy; Stock; returns; VAR; analysis (search for similar items in EconPapers)
Date: 2009
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