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Investor Valuations of Japan's Adoption of a Territorial Tax Regime: Quantifying the Direct and Competitive Effects of International Tax Reform

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  • Bradley, Sebastien

    ()
    (Drexel University)

  • Dauchy, Estelle

    ()
    (New Economics School)

  • Hasegawa, Makoto

    ()
    (National Graduate Institute for Policy Studies)

Abstract

Globalization of firm operations has brought the issue of multinational taxation to the forefront of tax reform debates worldwide, with countries paying increasingly close attention to tax developments elsewhere around the world. Using an event study methodology that emphasizes specific firm attributes, we examine investor reactions in both the Japanese and U.S. stock markets to nine events leading up to the enactment of the 2009 Japanese dividend exemption in order to measure the perceived gains in short- and long-term after-tax profitability resulting from this reform. We thus aim to provide a comprehensive evaluation of the full range of direct tax savings effects and indirect effects associated with changes in firm competitiveness and international tax competition. Preliminary results suggest that investors capitalized gains of over 1 percent and 0.3 percent on the date that the bill was finally passed in the Japanese and U.S. markets, respectively, with further pronounced gains arising in the aftermath of select earlier events associated with the revelation of significant new information. Direct tax savings are responsible for a significant proportion of estimated abnormal returns across multiple event dates, even for U.S. firms where these effects are necessarily largely in anticipation of the adoption of a similar territorial regime. Strikingly, the largest beneficiaries of the Japanese reform appear to be firms with less elaborate tax minimization strategies or with no foreign operations altogether, whereas U.S. multinationals with subsidiaries located in tax havens appear more heavily favored.

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Bibliographic Info

Paper provided by LeBow College of Business, Drexel University in its series School of Economics Working Paper Series with number 2013-2.

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Length: 88 pages
Date of creation: 01 Aug 2013
Date of revision:
Handle: RePEc:ris:drxlwp:2013_002

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Web page: http://www.lebow.drexel.edu/
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Keywords: territorial taxation; international tax reform; dividend exemption; tax competition; tax avoidance;

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