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Too complex to digest? Federal tax bills and their processing in US financial markets

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Listed:
  • Hamza Bennani

    (Nantes University)

  • Matthias Neuenkirch

    (Trier University and CESifo)

Abstract

In this paper, we analyze whether the textual complexity of tax bills affects financial markets. Based on the Flesch-Kincaid grade level of the 32 tax bills identified by Romer (Am Econ Rev 100(3):763–801, 2010)in the period 1962–2003, we assess the relationship between tax bills’ textual complexity and financial markets in various windows around the signing of a bill. Our results show a negative (positive) and significant relationship between the present value of tax bills and changes in the 10-year government bond yields (S &P 500 returns). The magnitude of this relationship increases over time, suggesting that market participants underreact at first and need a couple of days to digest the information contained in the tax bills. This delay can be explained by the textual characteristics of the bills in the case of the 10-year yields as a lower readability partly counteracts the negative relationship for up to three days after the signing of a tax bill. In the case of the stock market, we find similar evidence, but only for a part of the readability measures employed in this paper.

Suggested Citation

  • Hamza Bennani & Matthias Neuenkirch, 2024. "Too complex to digest? Federal tax bills and their processing in US financial markets," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(5), pages 1179-1203, October.
    • Handle: RePEc:kap:itaxpf:v:31:y:2024:i:5:d:10.1007_s10797-023-09795-9
    DOI: 10.1007/s10797-023-09795-9
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    More about this item

    Keywords

    Complexity; Financial markets; Readability; Tax bills;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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