Politically Motivated Taxes in Financial Markets: The Case of the French Financial Transaction Tax
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This paper studies the effects of the introduction of the French financial transaction tax in August 2012. With the tax, the French government aims to generate revenues for financing the burdens of the financial crisis and to curb short-term trading. We find that the financial transaction tax has a strong impact on trading intensity and liquidity supplier behavior. Trading volume decreases by about one-fifth compared to the pre-event period. While liquidity suppliers reduce the number of quote and price updates and post less volume at best prices, there is no evidence that spreads increase. Our results suggest that policy makers need to be well aware of the links between tax design and investor behavior, before introducing a financial transaction tax.
KeywordsFinancial Transaction tax Trading intensity Market liquidity
Financial support from Boerse Stuttgart is gratefully acknowledged. The views expressed here are those of the authors and do not necessarily represent the views of the Boerse Stuttgart.We thank an anonymous referee for valuable feedback.
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