Market Reaction to the Passage of the Tax Cuts and Jobs Act of 2017

Abstract

I investigate the market reaction to the events leading up to the passage of the Tax Cuts and Jobs Act of 2017 (TCJA) using short and long window event studies. Using the sample of S&P 1,500 firms, I find positive market reaction to the enactment of the TCJA only in one short window; market reaction to other windows remains weak. This study documents that firms with high marginal tax rate have positive market reaction only in one long window. Further investigation reveals that for the firms with deferred tax assets the market reaction is positive only in one short window and in another long window market reaction is negative. I also find weak evidence that firms with high deferred tax liabilities have a positive market reaction to the passage of the TCJA. In addition, I document that firms with high executive compensation record negative market reactions in the short windows, but no market reaction in the long windows. I finally find that market reaction to the marginal tax rate varies with firm corporate governance only in one short window. Overall, my study contributes to the existing tax and accounting literature by examining investor reaction to the passage of TCJA based on dominant firm characteristics such as marginal tax rates, corporate governance structures, the nature of deferred taxes, and the level of executive compensation for events leading to and after the passage of the Act.