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Asset Trade, Real Investment, and a Tilting Financial Transaction Tax

Author

Listed:
  • Tobias Dieler

    (Finance Department, University of Bristol, Bristol BS8 1PQ, United Kingdom)

  • Sonny Biswas

    (Finance Department, University of Bristol, Bristol BS8 1PQ, United Kingdom)

  • Giacomo Calzolari

    (Economics Department, European University Institute, Fiesole 50014, Italy; Centre for Economics Policy Research CEPR, London, United Kingdom)

  • Fabio Castiglionesi

    (Finance Department, Tilburg University, Tilburg 5037AB, The Netherlands)

Abstract

We study the impact of a financial transaction tax (FTT) in a model that combines asset trading and real investment. An informed trader holds private information about the fundamental value of a firm, and the firm’s manager relies on the asset price to infer such information and invest accordingly. We characterize an informative, but illiquid, equilibrium where the firm’s value is optimal but trade is inefficiently low, together with an uninformative equilibrium with maximal liquidity but inefficient firm value. Although an FTT inefficiently reduces trading, it may tilt the market’s equilibrium and make asset prices more informative. We characterize the situations in which one or the other of these two effects prevails. The analysis also helps us to reconcile some puzzling empirical evidence regarding the adoption of the FTT.

Suggested Citation

  • Tobias Dieler & Sonny Biswas & Giacomo Calzolari & Fabio Castiglionesi, 2023. "Asset Trade, Real Investment, and a Tilting Financial Transaction Tax," Management Science, INFORMS, vol. 69(4), pages 2401-2424, April.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:4:p:2401-2424
    DOI: 10.1287/mnsc.2022.4417
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    References listed on IDEAS

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    1. Dieler, Tobias & Biswas, Sonny & Calzolari, Giacomo & Castiglionesi, Fabio, 2023. "Asset trade, real investment and a tilting financial transaction tax," Other publications TiSEM d936387a-90f0-481a-a75b-3, Tilburg University, School of Economics and Management.

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