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A reexamination of investors' reaction to tax shelter news: Evidence from the Luxembourg tax leaks

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  • Nesbitt, Wayne L.
  • Outslay, Edmund
  • Persson, Anh V.

Abstract

This study examines the stock market reaction to the unprecedented leaks of confidential advance tax rulings between Luxembourg and multinational corporations—also known as the “LuxLeaks.” Contrary to the negative market reaction to tax shelter news documented in prior research, we find that investors responded positively to these leaks. This reaction is concentrated among U.S. firms. Furthermore, we document a positive association between abnormal returns and the reduction in firms' tax uncertainty, consistent with a downward revision in investors' perception of the tax uncertainty associated with the firms' Luxembourg operations. We also investigate other firm characteristics and find that, among U.S. firms, investors' reaction is weaker for those over-invested in tax avoidance. Among non-U.S. firms, the market response is muted by concerns about the quality of governance. In summary, our results suggest that investors' reaction to tax shelter news is conditional on their reassessment of the firms' tax uncertainty.

Suggested Citation

  • Nesbitt, Wayne L. & Outslay, Edmund & Persson, Anh V., 2023. "A reexamination of investors' reaction to tax shelter news: Evidence from the Luxembourg tax leaks," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    • Handle: RePEc:eee:jaecon:v:75:y:2023:i:2:s016541012200060x
    DOI: 10.1016/j.jacceco.2022.101537
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    More about this item

    Keywords

    Luxembourg tax leaks; Tax uncertainty; Tax rulings; Event study;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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