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The effects of tax policy on financial markets: G3 evidence

  • Arin, K. Peren
  • Mamun, Abdullah
  • Purushothman, Nanda

We investigate the effects of various tax policy innovations on stock market returns. By using a vector autoregressive model that controls for the mutual causality between fiscal policy and financial market performance, we test whether financial markets serve as a transmission mechanism for tax policy innovations. Our findings indicate that indirect taxes have a larger effect on market returns than do labor taxes. Further, corporate tax innovations do not have any statistically significant effect on stock returns. We consider that this finding is a result of a firm's ability to switch between equity financing and bond financing.

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File URL: http://www.sciencedirect.com/science/article/B6W61-4SV5V9R-1/2/5c1f443bdd6155196ede5a67b22bd827
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Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 18 (2009)
Issue (Month): 1 (January)
Pages: 33-46

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Handle: RePEc:eee:revfin:v:18:y:2009:i:1:p:33-46
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620170

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  8. Tavares, Jose & Valkanov, Rossen, 2001. "The neglected effect of fiscal policy on stock and bond returns," FEUNL Working Paper Series wp413, Universidade Nova de Lisboa, Faculdade de Economia.
  9. Bohl, Martin T. & Siklos, Pierre L. & Werner, Thomas, 2007. "Do central banks react to the stock market? The case of the Bundesbank," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 719-733, March.
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