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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

Author

Listed:
  • Estelle P. Dauchy

    () (New Economic School)

  • Sebastien Bradley

    () (Department of Economics, LeBow College of Business, Drexel University)

  • Makoto Hasegawa

    () (National Graduate Institute for Policy Studies)

Abstract

Despite an extensive literature on the normative implications of different international tax regimes and an empirical literature addressing individual specific predictions, there exists little evidence encompassing the broad range of effects of taxing corporations' foreign-source income on a worldwide or territorial basis. This paper takes a more comprehensive quantitative approach by examining stock market reactions surrounding three events over the course of which Japan's 2009 adoption of a dividend exemption system was developed into proposed law. Using an event study methodology which leverages individual firm characteristics and accounts for contemporaneous financial market developments, we find that Japanese firms with less foreign exposure and fewer opportunities for tax avoidance experienced relatively larger abnormal returns, while differences in firms' foreign and domestic effective tax rates accounted for an aggregate capitalization effect of 4.1 trillion JPY. We attribute these gains to a combination of enhanced opportunities for international expansion among smaller domestic firms, direct tax savings on official estimates of existing undistributed foreign earnings, and general cultural biases against tax planning in an environment of largely unchanged anti-abuse provisions. Spillover effects in the U.S. and German markets (through tax competition or firm competitiveness) appear insignificant.

Suggested Citation

  • Estelle P. Dauchy & Sebastien Bradley & Makoto Hasegawa, 2014. "Investor Valuations of Japan's Adoption of a Territorial Tax Regime: Quantifying the Direct and Competitive Effects of International Tax Reform," Working Papers w0201, Center for Economic and Financial Research (CEFIR).
  • Handle: RePEc:cfr:cefirw:w0201
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    References listed on IDEAS

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    Cited by:

    1. Hasegawa, Makoto & Kiyota, Kozo, 2017. "The effect of moving to a territorial tax system on profit repatriation: Evidence from Japan," Journal of Public Economics, Elsevier, vol. 153(C), pages 92-110.

    More about this item

    Keywords

    International tax reform; Japanese dividend exemption; territorial taxation; multinational tax avoidance; tax competition; event study;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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