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International Tax and Public Finance

, Volume 26, Issue 6, pp 1259–1290 | Cite as

Increasing tax transparency: investor reactions to the country-by-country reporting requirement for EU financial institutions

  • Verena K. Dutt
  • Christopher A. Ludwig
  • Katharina Nicolay
  • Heiko Vay
  • Johannes VogetEmail author
Article

Abstract

We employ an event study methodology to investigate the capital market reaction to the surprising political decision to adopt a public country-by-country reporting (CbCR) obligation for EU financial institutions. Our results are suggestive of a zero response in our full sample of financial institutions headquartered in the EU. We conduct several sample splits and find that the investor reaction is slightly more negative for banks engaging in selected tax havens and banks with an above-average B2C orientation and slightly more positive for banks with a below-average share of institutional investors. We conclude that investors anticipated a simultaneous reduction in banks’ tax avoidance opportunities and in information asymmetries between managers and shareholders, implying both negative and positive stock price reactions which offset each other on average. We relate our findings to previous studies on the introduction of similar tax transparency measures and contend that capital market reactions to increases in tax transparency depend crucially on the exact design and objective of the initiative. Our inferences are of special importance in light of the ongoing debate whether to enact a general public CbCR obligation for large multinational firms in the EU.

Keywords

Tax avoidance Profit shifting Country-by-country reporting Financial institutions Market reaction Event study 

JEL Classification

H25 H26 G21 G28 

Notes

Acknowledgements

We thank Leslie Robinson, Olli Ropponen, Martin Simmler, two anonymous referees and the participants of the International Institute of Public Finance (IIPF) Annual Congress 2018 in Tampere, the European Economic Association (EEA) Annual Congress 2018 in Cologne, the Annual Conference 2018 of the Verein für Socialpolitik (VfS) in Freiburg and the Mannheim Taxation (MaTax) Science Campus Meeting 2017 in Mannheim for their helpful suggestions and comments. We gratefully acknowledge funding from the MaTax Science Campus and from the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation)—Project ID 403041268—TRR 266.

Supplementary material

10797_2019_9575_MOESM1_ESM.docx (2 mb)
Supplementary material 1 (DOCX 2024 kb)

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.University of MannheimMannheimGermany
  2. 2.ZEW MannheimMannheimGermany

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