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Too Complex to Digest ? Federal Tax Bills and Their Processing in US Financial Markets

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  • Hamza Bennani

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université)

  • Matthias Neuenkirch

    (CESifo - CESifo, Trier University)

Abstract

In this paper, we analyze whether the complexity of tax bills affects financial markets. Based on the Flesch-Kincaid grade level of the 32 tax bills identified by Romer and Romer (2010) in the period 1962-2003, we assess the relationship between tax bills' complexity and financial markets using an event study approach. 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 offsets the negative relationship for up to three days after the signing of a tax bill, but not thereafter. In the case of the stock market, we find similar offsetting evidence, but only for a part of the readability measures employed in this paper.

Suggested Citation

  • Hamza Bennani & Matthias Neuenkirch, 2022. "Too Complex to Digest ? Federal Tax Bills and Their Processing in US Financial Markets," Working Papers hal-03827870, HAL.
    • Handle: RePEc:hal:wpaper:hal-03827870
    Note: View the original document on HAL open archive server: https://hal.science/hal-03827870
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    More about this item

    Keywords

    Complexity; Event Study; 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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