Making Only America Great? Non-U.S. Market Reactions to U.S. Tax Reform

Abstract

We study the foreign externalities of the recent U.S. tax reform, commonly known as the Tax Cuts and Jobs Act (TCJA). Specifically, we examine foreign firms' stock returns around key tax reform events. We find significant heterogeneity in market responses by country, industry, and firm. Chinese firms experience large negative returns, especially in steel, business equipment, and chemical manufacturers, whereas the rest of the world experiences positive returns. Firms operating in more differentiated product markets experience positive returns, whereas firms in financial distress experience negative returns, consistent with the TCJA having competitive repercussions. We also find that firms experiencing decreases in effective tax rates following tax reform experience positive returns. Overall, our results suggest that the TCJA had varied, yet systematic effects on foreign firms' shareholders' wealth and the global competitive landscape.

Competitive Externalities of Tax Cuts

“…Using the most conservatively estimated β coefficient in column 4, a one‐standard‐deviation increase in repatriation amounts results in 0.2% lower market‐adjusted annual returns. The negative externalities of tax cuts reflected in nonrepatriating competitor's annual stock returns also aligns with the Gaertner, Hoopes, and Williams [2020] conclusion that the TCJA had a competitive effect on the stock returns of U.S. firms’ foreign competitors.…”

The Tax Cuts and Jobs Act: Which Firms Won? Which Lost?

“…They also test (but do not find support for) the idea that financially constrained firms benefited from the TCJA. Gaertner, Hoopes, and Williams (2020) study international stock price reactions to the TCJA. Chen and Koester (2020) show that although analysts' GAAP earnings forecasts and revisions failed to incorporate the vast majority of the deferred tax adjustment that could be expected based on firms' past financials, investors did impound this adjustment into prices during the period of the TCJA's enactment.…”

The Effects of the Tax Cuts and Jobs Act of 2017 on Defined Benefit Pension Contributions*

“…Most of the uncertainty around the TCJA was resolved in early December of 2017, as the Senate approved the legislation on a 51–48 vote. See Gaertner et al (2019) for a timeline of major developments leading to TCJA passage.…”