Cross-Border Effects of a Major Tax Reform: Evidence from the European Stock Market

This study analyzes the impact of the Tax Cuts and Jobs Act (TCJA) on the European stock market, focusing on European firms with significant U.S. operations and those competing with U.S. firms. The research examines how the TCJA affects these firms directly and indirectly, exploring the potential implications for international trade. The research design includes measuring U.S. activity and competition to evaluate the hypotheses formulated.

• Tax Reform
• European Stock Market
• TCJA
• International Trade
• Research Design

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1. Cross-border Effects of a Major Tax Reform - Evidence from the European Stock Market Michael Overesch (University of Cologne) Max Pflitsch (University of Cologne) NTA Annual Congress 2019 Max Pflitsch

2. Motivation and Contribution I Analyze the European stock market reaction to the Tax Cuts and Job Act [TCJA] TCJA is the largest U.S. tax reform in 30 years Previous research focusses on domestic effects (Wagner et al. 2018) Stock markets reactions to foreign tax reforms have rarely been studied (e.g. Bradley et al. 2018, Gaertner et al 2019) The inclusion of certain less conventional international tax provisions could contravene the U.S. s double taxation treaties and may risk having a major distortive impact on international trade. (Peter Altmaier, Bruno Le Maire, Philip Hammond, Pier Carlo Padoan, Crist bal, Montoro Romero) NTA Annual Congress 2019 Max Pflitsch Folie: 2

3. Hypothesis European firms could be affected in at least two ways Directly affected (if they have U.S. operations) Indirectly affected (if they compete with U.S. firms) H1: European firms which have significant U.S. operations benefit from the TCJA H2: European firms which compete heavily with U.S. firms in their domestic markets lose from the TCJA because U.S. firms gain competitiveness (?) NTA Annual Congress 2019 Max Pflitsch Folie: 4

4. Research Design - Event Date December 15th2017: Conference Agreement published Two senators announced support for the final version Former versions (House- and Senate bill) differed widely Time zone difference Earliest reaction on Monday, December 18th NTA Annual Congress 2019 Max Pflitsch Folie: 5

5. Measuring US Activity (H1) and Competition (H2) US Activity is measured by geographic segment data on revenue (not reported coherently, firms report on country-, continental- or other levels) Not possible to exactly pin down the fraction of revenue obtained in the U.S. ??? ???????????????????????? ???? ??????? ?? ?????? ?????????? =1, 0, Competition with US firms: Proxy for European market share of US Corporations: ?????????= ????????????????????????????? ???? ??????????? ???? NTA Annual Congress 2019 Max Pflitsch Folie: 6

6. NTA Annual Congress 2019 Max Pflitsch Folie: 7

7. Research Design Regression Model NTA Annual Congress 2019 Max Pflitsch Folie: 8

8. Regression Results 1 Day (1) 0.362***0.346***0.541***0.527***0.766***0.737***0.749***0.682***0.907***0.920*** (0.075)(0.080)(0.105)(0.115)(0.135)(0.147)(0.166)(0.173)(0.302)(0.319) -1.139 -0.684-2.695**-2.773**-6.781***-6.789***-6.096***-5.017**-8.411* (0.862)(1.030)(1.178)(1.341)(1.385)(1.647)(2.188)(2.428)(4.490)(5.682) 0.115***0.107***0.103***0.101***0.056 (0.024)(0.024)(0.029)(0.031)(0.039)(0.040)(0.056)(0.056)(0.090)(0.084) 0.463 0.494 0.414 0.430 0.396 (0.343)(0.349)(0.313)(0.318)(0.372)(0.380)(0.638)(0.643)(1.053)(1.072) -0.023-0.027*0.021***0.019***0.038***0.034***0.010 (0.015)(0.015)(0.005)(0.006)(0.010)(0.012)(0.008)(0.011)(0.027)(0.020) -1.536***-0.769-1.114-0.929 0.118 (0.517)(0.604)(0.679)(0.800)(0.908)(1.019)(1.210)(1.646)(2.060)(2.177) 2 Days (3) 3 Days (5) 1 Week (7) 1 Month (9) (2) (4) (6) (8) (10) US Activity -1.781 US Comp EU 0.056 0.139**0.147***-0.214**-0.233*** Market Capitalizazion Profitability 0.394 -0.438 -0.465 -0.999 -0.841 Growth 0.001-0.073***-0.086*** Constant 1.141 -1.129 1.6339.430***15.692*** Industry Fixed effects? Observations R2 - Yes - Yes - Yes - Yes - Yes 1,675 0.065 1,675 0.079 1,685 0.054 1,685 0.069 1,695 0.056 1,695 0.068 1,691 0.070 1,691 0.092 1,692 0.031 1,692 0.060 NTA Annual Congress 2019 Max Pflitsch Folie: 9

9. Summary The European stock market was affected by the TCJA European firms active in the U.S. experienced significant positive abnormal returns European firms in industries with high U.S. competition had significant lower abnormal returns These results appear robust in various specifications NTA Annual Congress 2019 Max Pflitsch Folie: 10

10. Current work in progress: H1: Assets instead of revenue as the US-Activity proxy H2: Revenue instead of NoE of US-CFC s to compute the competition measure Searching further proxies for US competition Evaluate change in ETR as a proxy for US Activity (Gaertner et al. 2019) Price and variance contribution analysis (Wagner et al. 2018) Examine more event dates Joint tests for CAR s using multiple event dates NTA Annual Congress 2019 Max Pflitsch Folie: 11

11. Appendix NTA Annual Congress 2019 Max Pflitsch Folie: 12

12. Additional Dates House bill: Nov 2nd Senate bill: Dec 4th (1) (4) US Activity -0.113 (0.092) -2.115* (1.220) Yes 1,684 0.068 0.004 (0.088) -3.181** (1.480) Yes 1,678 0.085 US Comp EU Industry Fixed effects? Observations R2 NTA Annual Congress 2019 Max Pflitsch Folie: 13

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14. Cross-correlation and event induced volatility Window-length 1 Day 2 Days 3 Days 1 Week 1 Month CAAR (%) P Value CAAR (%) P Value Panel A: Two-way sample split 0.657* 0.059 0.216 0.394 0.859* 0.058 0.250 0.389 0.945* 0.072 0.221 0.477 1.167* 0.077 0.297 0.532 2.618** 0.035 2.036* 0.085 US-Active Not US-Active CAAR (%) P Value CAAR (%) P Value CAAR (%) P Value CAAR (%) P Value Panel B: Four-way sample split 0.813** 0.023 0.550 0.118 0.258 0.294 0.137 0.701 1.053** 0.031 0.729 0.103 0.313 0.311 0.132 0.668 1.337** 1.582** 0.026 0.681 0.155 0.365 0.305 -0.048 0.986 3.174** 0.013 2.247* 0.079 2.036 0.071 2.036 0.190 US-Active and Low Comp 0.030 0.890 0.157 0.472 0.361 -0.036 0.977 US-Active and High Comp Not US-Active and Low Comp Not US-Active and High Comp NTA Annual Congress 2019 Max Pflitsch Folie: 16

15. Competition Ratio Based on Revenues 1 Day (1) 0.344*** (0.079) -0.602 (0.553) Yes 1,670 0.079 2 Days (2) 0.516*** (0.118) -1.606*** (0.615) Yes 1,680 0.069 3 Days (3) 0.706*** (0.151) -3.346*** (0.853) Yes 1,690 0.067 1 Week (4) 0.659*** (0.174) -1.785 (1.474) Yes 1,686 0.092 1 Month (5) 0.967*** (0.320) -4.617* (2.706) Yes 1,687 0.061 US Activity US Comp EU Industry fixed effects? Observations R2 NTA Annual Congress 2019 Max Pflitsch Folie: 17

16. Alternative ways to compute the normal return 1 Day 2 Days 3 Days 1 Week 1 Month (1) (2) (3) (4) (5) Panel A Stoxx 1800 ex Europe as Market Portfolio 0.367*** (0.081) -0.581 (1.037) 0.539*** (0.116) -2.706** (1.346) 0.733*** (0.147) -6.743*** (1.648) 0.687*** (0.173) -4.910** (2.425) 0.954*** (0.320) -1.600 (5.711) US Activity US Comp EU Fama French Three-Factor Model Panel B 0.338*** (0.080) -0.540 (1.058) 0.521*** (0.114) -2.918** (1.358) 0.684*** (0.140) -7.343*** (1.662) 0.650*** (0.169) -5.142** (2.552) 0.878*** (0.325) -2.896 (5.699) US Activity US Comp EU Panel C Market Adjusted Returns 0.391*** (0.083) -0.501 (1.051) Yes 1,675 0.550*** (0.115) -2.817** (1.352) Yes 1,685 0.711*** (0.142) -7.308*** (1.638) Yes 1,695 0.699*** (0.167) -5.739** (2.599) Yes 1,691 1.113*** (0.330) -2.249 (6.117) Yes 1,692 US Activity US Comp EU Industry fixed effects? Observations NTA Annual Congress 2019 Max Pflitsch Folie: 18

17. Return transformation 1 Day 2 Days 3 Days 1 Week 1 Month (1) (2) (3) (4) (5) Panel A: No return transformation US Activity 0.403*** (0.104) -1.231 (1.329) 0.530*** (0.164) -0.994 (1.877) 0.736*** (0.172) -4.538** (2.107) 0.704*** (0.199) -6.304** (2.848) 0.975* (0.516) 6.251 (8.759) US Comp EU Panel B: Winsorized returns US Activity US Comp EU Industry fixed effects? Observations Panel B: R2 Panel A: R2 . 0.383*** (0.093) -0.687 (1.064) Yes 1,718 0.076 0.065 0.547*** (0.141) -1.738 (1.402) Yes 1,718 0.065 0.061 0.774*** (0.162) -5.082*** (1.757) Yes 1,718 0.068 0.063 0.739*** (0.181) -5.878** (2.525) Yes 1,718 0.093 0.088 1.040*** (0.361) 3.463 (7.445) Yes 1,717 0.072 0.062 NTA Annual Congress 2019 Max Pflitsch Folie: 19

18. Research Design - Normal Return Estimation NTA Annual Congress 2019 Max Pflitsch Folie: 20