Cover of EconPol Working Paper 36

Ring-fencing Digital Corporations: Investor Reaction to the European Commission’s Digital Tax Proposals

Daniel Klein (University of Mannheim), Christopher A. Ludwig (EconPol Europe, ZEW Mannheim, University of Mannheim), Christoph Spengel (EconPol Europe, University of Mannheim, ZEW Mannheim)

In this working paper, Daniel Klein (University of Mannheim), Christopher A. Ludwig (EconPol Europe, ZEW Mannheim, University of Mannheim) and Christoph Spengel (EconPol Europe, University of Mannheim, ZEW Mannheim) study the effect of digital tax measures on firm value and find that expectations about ring-fencing digital tax measures impact firm values. An analysis of investor reaction to the European Commission’s proposals on the taxation of digital corporations reveals a significant abnormal capital market reaction of -0.692 percentage points. The investor reaction is more pronounced for firms that engage more actively in tax avoidance, have a higher profit shifting potential, and for those with higher exposure to the EU. The market value of digital and innovative corporations decreased by at least 52 billion euro in excess of the regular market movement during the event window. 

Abstract

We study the effect of digital tax measures on firm value. By employing an event study methodology, we analyze investor reaction to the European Commission’s proposals on the taxation of digital corporations. Examining the stock returns of potentially affected corporations surrounding the draft directives’ release, we find a significant abnormal capital market reaction
of -0.692 percentage points. The investor reaction is more pronounced for firms that engage more actively in tax avoidance, have a higher profit shifting potential, and for those with higher exposure to the EU. The market value of digital and innovative corporations decreased by at least 52 billion euro in excess of the regular market movement during the event window. Overall, our study reveals that expectations about ring-fencing digital tax measures impact firm values.

Citation

Daniel Klein, Christopher A. Ludwig, Christoph Spengel: Ring-fencing Digital Corporations: Investor Reaction to the European Commission’s Digital Tax Proposals, EconPol Working Paper 36, November 2019