Election-day market reactions to tax proposals: Evidence from a close vote

We ask whether stock markets react to political leaders' intentions to tax shareholders immediately following their election. Our natural laboratory is the surprising outcome of the September 2021 Japanese Prime Ministerial election. Using an event study approach, we find firms that are vulnerable to a potential tax increase, such as those paying or receiving dividends, demonstrate lower stock returns compared to their counterparts. In contrast, our analysis does not show differences in stock returns between firms earning interest income and those that do not. Moreover, among high dividend yield firms, a striking contrast emerges: those with substantial individual ownership show a decline in stock returns, while those with significant foreign ownership exhibit an increase. These results highlight the targeted impact of shareholder taxation on domestic shareholders, distinguishing them from debt holders or foreign investors, right from Election Day.