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Banks stock market reaction to the Italian and Spanish windfall tax announcement: an event study

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Abstract

This paper analyses the Eurozone banks’ short-term market reaction to the introduction of windfall tax in Spain and Italy. Using an event study, I show that stocks react significantly negatively to the windfall tax announcements. The drop was more pronounced for Spanish and Italian banks, which were directly affected by the measure. According to the cash flow hypothesis, an increase in tax burdens/liabilities significantly affects the bank’s cash flows and profitability, leading to a decline in the bank’s market value. High-tax, small, operationally efficient, and profitable banks with high institutional ownership show higher negative abnormal returns to the measure announcement.

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Notes

  1. https://www.reuters.com/world/europe/spanish-ruling-coalition-proposes-windfall-tax-utilities-banks-2022-07-28/.

  2. https://www.bbc.com/news/business-66454080.

  3. https://www.ft.com/content/a1fb90a5-46e4-4a16-acc9-a1dbebebd3c7.

  4. https://www.cnbc.com/2023/08/08/italian-bank-shares-tank-after-government-surprises-with-windfall-tax.html.

  5. Although the windfall tax has also been introduced in the banking sector of other European countries, the case of the Czech Republic, Lithuania and Hungary, the lack of listed banks in these countries or their reduced expression, led the author to only analyse the effects in Spain and Italy.

  6. https://www.europarl.europa.eu/RegData/etudes/BRIE/2022/733723/IPOL_BRI(2022)733723_EN.pdf.

  7. One of the objectives of the governments of Spain and Italy is that the windfall tax encourages the lenders to pass on more of the benefit they receive from rising policy rates on to customers. However, Spain and Italy continue to be two of the countries with the lowest pass-through rates in Europe. However, it is debatable whether such moves are designed to change lenders’ behaviour or are simply a means of raising quick revenues in a politically painless way.

  8. For more details, please see MacKinlay [16] and Serra [24].

  9. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

  10. For more details, please see Serra [25].

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Acknowledgements

This paper is financed by Portuguese national funds through FCT – Fundação para a Ciência e a Tecnologia, I.P., project number UIDB/00685/2020.

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Authors and Affiliations

  1. Faculty of Social Sciences, University of Madeira, Caminho da Penteada, 9020-105, Funchal, Portugal

    António Miguel Martins

  2. Centre of Applied Economic Studies of the Atlantic (CEEAplA), Ponta Delgada, Azores, Portugal

    António Miguel Martins

  3. School of Social Sciences, CEFAGE-UE and University of Évora, Largo dos Colegiais, 2, 7004-516, Évora, Portugal

    António Miguel Martins

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Martins, A.M. Banks stock market reaction to the Italian and Spanish windfall tax announcement: an event study. J Bank Regul (2024). https://doi.org/10.1057/s41261-024-00246-x

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