AAA Spark Meeting of Regions

Does Economic Uncertainty About the Tax Cuts and Jobs Act Affect Investors’ Information Asymmetry?

• In Event: Tax News: Empirical Studies and Implementing it in the Classroom

Abstract

This paper evaluates whether economic uncertainty about the Tax Cuts and Jobs Act of 2017 (TCJA) is associated with an increase in information asymmetry. I use key legislative events preceding the enactment of the TCJA as an exogenous shock to firms’ information environments to capture economic uncertainty. Overall, I find that economic uncertainty around the TCJA’s legislative events leads to greater information asymmetry between investors. From cross-sectional analyses of pre-passage TCJA event dates, I find that information asymmetry increases more for firms with higher exposure to TCJA policy change related to interest expense, while the increase in information asymmetry is less pronounced for firms with higher exposure to policy changes related to capital investments and tax rates. These results suggest that investors view the financial statement effects of policy changes resulting in increases to bonus depreciation and reductions to corporate tax rates as more transparent than those limiting interest expense deductions. Overall, this study identifies a significant cost (i.e., increased information asymmetry) to some investors that occurred during the development stages of the TCJA bill.

Author

• Eduardo Fuste, Florida State University