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The effects of tax policy on financial markets: G3 evidence
Author(s) -
Arin K. Peren,
Mamun Abdullah,
Purushothman Nanda
Publication year - 2009
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2008.05.001
Subject(s) - economics , monetary economics , equity (law) , tax policy , stock market , stock (firearms) , financial market , bond , tax reform , finance , law , public economics , biology , engineering , horse , mechanical engineering , paleontology , political science
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.