Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266129 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
Graduate Institute of International and Development Studies Working Paper No. HEIDWP14-2022
Publisher: 
Graduate Institute of International and Development Studies, Geneva
Abstract: 
This paper examines whether investors react to consumption taxes. Despite the near global adoption of VAT policies, relatively little is known regarding the investor response to VAT changes. In an event-study setup, using a new dataset of daily equity returns and precise dates of tax policy announcements across 20 countries between 1990 and 2014, I find heterogeneous responses: in advanced economies, equities react negatively to an announcement regarding a consumption tax increase, while in emerging markets, equities react positively to similar announcements. In emerging economies, the positive response to consumption tax increases is amplified in times of worsening macro-indicators, such as higher fiscal deficits and inflation. This result holds using both country-level index returns and firm-level equity returns. Furthermore, in emerging economies, the equity returns of high-debt firms respond more positively to VAT increases. Overall, the results suggest that investor sentiment in emerging economies is positive in response to VAT increases. This may be due to the expectation that fiscal prudence will prevent increases in interest rates, which would be particularly damaging for countries with deteriorating macro-conditions and firms with high levels of debt.
Subjects: 
Fiscal Policies
Financial Markets
Macroeconomic Conditions
Corporate Debt
JEL: 
H3
E6
G1
Document Type: 
Working Paper

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