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Increasing tax transparency: investor reactions to the country-by-country reporting requirement for EU financial institutions

Verena K. Dutt (), Christopher A. Ludwig (), Katharina Nicolay (), Heiko Vay () and Johannes Voget ()
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Verena K. Dutt: University of Mannheim
Christopher A. Ludwig: University of Mannheim
Katharina Nicolay: University of Mannheim
Heiko Vay: University of Mannheim
Johannes Voget: University of Mannheim

International Tax and Public Finance, 2019, vol. 26, issue 6, 1259-1290

Abstract: Abstract We employ an event study methodology to investigate the capital market reaction to the surprising political decision to adopt a public country-by-country reporting (CbCR) obligation for EU financial institutions. Our results are suggestive of a zero response in our full sample of financial institutions headquartered in the EU. We conduct several sample splits and find that the investor reaction is slightly more negative for banks engaging in selected tax havens and banks with an above-average B2C orientation and slightly more positive for banks with a below-average share of institutional investors. We conclude that investors anticipated a simultaneous reduction in banks’ tax avoidance opportunities and in information asymmetries between managers and shareholders, implying both negative and positive stock price reactions which offset each other on average. We relate our findings to previous studies on the introduction of similar tax transparency measures and contend that capital market reactions to increases in tax transparency depend crucially on the exact design and objective of the initiative. Our inferences are of special importance in light of the ongoing debate whether to enact a general public CbCR obligation for large multinational firms in the EU.

Keywords: Tax avoidance; Profit shifting; Country-by-country reporting; Financial institutions; Market reaction; Event study (search for similar items in EconPapers)
JEL-codes: H25 H26 G21 G28 (search for similar items in EconPapers)
Date: 2019
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