The Impact Of Tax Reforms On Stock Market Efficiency: A Study On Policy Changes And Market Dynamics

Yessica Amelia; Ngadi Permana; Sarah Fitriyani

doi:10.53787/iconev.v5i1.39

Authors

Yessica Amelia STIE Kasih Bangsa
Ngadi Permana STIE Kasih Bangsa
Sarah Fitriyani STIE Kasih Bangsa

DOI:

https://doi.org/10.53787/iconev.v5i1.39

Keywords:

Tax reform, stock market efficiency, liquidity, information asymmetry, market volatility

Abstract

This study examines the impact of tax reforms on stock market efficiency, focusing on how policy changes influence liquidity, price dynamics, and information flow within financial markets. Using the Tax Cuts and Jobs Act (TCJA) of 2017 as a case study, this research explores how tax reductions affect corporate decision-making, trading behavior, and the efficiency of asset pricing. The findings suggest that while tax reforms can enhance short-term liquidity and improve transparency in stock pricing, they also introduce challenges such as increased market volatility and information asymmetry. These results underscore the importance of aligning tax policies with market stability goals to optimize investor confidence and overall market efficiency.

References

Auerbach, A. J. (2018). Measuring the effects of corporate tax cuts. Journal of Economic Perspectives, 32(4), 97–120.

Beyer, B. D., Downes, J. F., Mathis, M. E., & Rapley, E. T. (2023). U.S. multinational companies' payout and investment decisions in response to international tax provisions of the Tax Cuts and Jobs Act of 2017. Journal of the American Taxation Association, 45(1), 35–61.

Bissoondoyal-Bheenick, E., Do, H., Hu, X., & Zhong, A. (2022). Sentiment and stock market connectedness: Evidence from the US-China trade war. International Review of Financial Analysis, 80, 102031. https://doi.org/10.1016/j.irfa.2022.102031

Bourdeau-Brien, M., & Kryzanowski, L. (2017). The impact of natural disasters on the stock returns and volatilities of local firms. The Quarterly Review of Economics and Finance, 63, 259–270. https://doi.org/10.1016/j.qref.2016.06.009

Chiu, Y. C. (2020). Macroeconomic uncertainty, information competition, and liquidity. Finance Research Letters, 34, 101262. https://doi.org/10.1016/j.frl.2019.08.019

Chordia, T., Roll, R., & Subrahmanyam, A. (2008). Liquidity and market efficiency. Journal of Financial Economics, 87(2), 249–268. https://doi.org/10.1016/j.jfineco.2007.03.005

Dash, A., Atalay, H., & Cheng, X. (2021). Financial markets, information asymmetry, and volatility post-TCJA. Financial Markets Review, 16(3), 202–221. https://doi.org/10.1007/s10203-021-00329-1

Easley, D., Kiefer, N. M., & O'Hara, M. (1997). The information content of the trading process. Journal of Empirical Finance, 4(2–3), 159–186. https://doi.org/10.1016/S0927-5398(97)00007-0

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2), 383–417. https://doi.org/10.2307/2325486

Fatemi, D., Kim, J.-C., Mazumder, S., & Su, Q. (2024). The effect of changes in tax laws on stock liquidity: Evidence from the Tax Cuts and Jobs Act. The Journal of Corporate Accounting & Finance. https://doi.org/10.1002/jcaf.22765

Frino, A., Palumbo, R., & Rosati, F. (2023). Volatility and the financial implications of the Tax Cuts and Jobs Act of 2017. Journal of International Financial Markets, 53(2), 230–245. https://doi.org/10.1016/j.intfin.2023.101709

Fuste, E. (2021). Does economic uncertainty about the Tax Cuts and Jobs Act of 2017 affect investors' information asymmetry? (Doctoral dissertation, Florida State University).

Gaertner, F. B., Hoopes, J. L., & Williams, B. M. (2020). Making only America great? Non-U.S. market reactions to U.S. tax reform. Management Science, 66(2), 687–697. https://doi.org/10.1287/mnsc.2018.3217

Kim, J.-C., & Su, Q. (2023). The dynamics of utility stocks amidst adversity of Hurricane Sandy. Finance Research Letters, 58, 104631. https://doi.org/10.1016/j.frl.2022.104631

Kyle, A. (1985). Continuous auctions and insider trading. Econometrica, 53, 1315–1336. https://doi.org/10.2307/1913210

Quah, H., Haman, J., & Naidu, D. (2021). The effect of stock liquidity on investment efficiency under financing constraints and asymmetric information: Evidence from the United States. Accounting & Finance, 61, 2109–2150. https://doi.org/10.1111/acfi.12775

Wagner, A. F., Zeckhauser, R. J., & Ziegler, A. (2018). Unequal rewards to firms: Stock market responses to the Trump election and the 2017 corporate tax reform. American Economic Association Papers and Proceedings, 108, 590–596. https://doi.org/10.1257/pandp.20181014

Zhang, L., Chen, W., & Hu, N. (2023). Economic policy uncertainty and stock liquidity: Evidence from China. International Journal of Emerging Markets, 18(1), 22–44. https://doi.org/10.1108/IJOEM-03-2021-0427