We aimed to provide a more general understanding of how tax reporting requirements are perceived by investors. The introduction of a CbCR requirement for EU financial institutions in 2013 (see Infobox) implies that more tax-related information is available to stakeholders and the general public. To assess the consequences of the new legislation for the companies’ future profits, investors have to predict how managers, tax authorities, consumers and the public sentiment will react to such a new requirement.
Overall stock price reaction
The effects cancel out
When splitting our sample, however, we found that the reaction is slightly more negative for banks that are engaged in selected tax havens and for banks with an above-average business-to-consumer orientation, and slightly more positive for banks with a below-average share of institutional investors. Based on these results and prior literature, we conclude that investors anticipated both a reduction in banks’ tax avoidance opportunities and a decline in information asymmetries between managers and shareholders. These two different channels trigger both negative and positive capital market reactions, but as they cancel each other out, they lead to an average overall effect of zero.
Our findings are especially relevant for policymakers deciding upon the implementation of additional tax disclosure rules. Taking together our results and previous findings on investor reactions to new tax transparency measures, we conclude that capital market reactions to increases in tax transparency depend crucially on the exact design and objective of the initiative. Compared to the CbCR for EU financial institutions, the current proposal by the European Commission and the European Parliament for a public CbCR for all multinational firms in the EU with profits above a certain threshold, provides for a more salient way of disclosure and a more comprehensive list of reportable items. This could further increase the effectiveness of the CbCR in preventing tax avoidance and thereby affect the perception of the disclosure requirement by investors.
The paper will be complemented by a further study on the additional insights that CbCR data provides with respect to the tax planning activities and the tax haven usage of EU financial institutions compared to conventional datasets.
Read the Publication “Increasing tax transparency: investor reactions to the country-by-country reporting requirements for EU financial institutions” by Verena K. Dutt, Christopher A. Ludwig, Katharina Nicolay, Heiko Vay and Johannes Voget in International Tax and Public Finance, published online: https://doi.org/10.1007/s10797-019-09575-4
Country-by-country reporting is a measure to limit extensive profit shifting activities. Article 89 of the Capital Requirements Directive IV (Directive 2013/36/EU) requires EU credit institutions and investments firm to publicly disclose turnover, the number of employees, profit or loss before tax, tax on profit or loss and public subsidies received on a per-country basis as well as the name, location and nature of activities of their subsidiaries and branches. Groups headquartered in the EU have to provide a CbCR with respect to the whole group, whereas groups headquartered outside the EU only have to disclose information on their EU entities, including their subsidiaries and branches.
We employed an event study methodology. For our main specification, we used ownership information provided by the Orbis Bank Focus database to construct a sample of listed entities of bank groups whose global ultimate owner is located in the EU. We merged the ownership information with daily stock prices from Datastream/Eikon for the period from January 2012 to December 2014. Our final main sample included 155 listed banks.