Market and Firm Reaction to Targeted Tax Benefits: Evidence from the Tax Reform Act of 1986

• In Event: Taxation

Abstract

This study examines the market reaction to targeted tax benefits, as well as the investment choices of firms receiving these benefits. Specifically, we examine market and firm reactions to a tax refund granted to some steel firms in the Tax Reform Act of 1986 (TRA86). We test the market reaction around three key dates in the TRA86 legislative process and find that relative to steel firms not receiving the refund, qualifying steel firms experience either a negative market reaction or no significant reaction around each event date. Using a difference-in-differences analysis to test a variety of uses of the refund, our findings suggest that refund recipients use the proceeds to pay down debt rather than to increase capital assets, cash holdings, payouts to shareholders, acquisitions, or employment. Overall, this study finds that the economic effects of targeted tax benefits are difficult to predict and are highly dependent on the specific facts and circumstances surrounding their implementation.

Authors

• Jennifer Luchs-Nunez, University of Connecticut

• George A Plesko, University of Connecticut

• Steve Utke, University of Connecticut