Tax Policy Uncertainty and Stock Return Volatility

62 Pages Posted: 2 Nov 2013 Last revised: 10 Sep 2021

See all articles by Jennifer L. Brown

Jennifer L. Brown

Arizona State University (ASU) - W.P. Carey School of Business

KC Lin

Central Michigan University - College of Business Administration

Jared A. Moore

Western Washington University

Laura Wellman

Pennsylvania State University; Pennsylvania State University - Department of Accounting; Penn State University

Date Written: January 20, 2017

Abstract

This study finds that stock return volatility is higher during periods of high tax policy uncertainty (TPU), even after controlling for other sources of general macroeconomic uncertainty. Further, we find that the relation between TPU and stock return volatility is more pronounced where firms are characterized by greater variability in tax outcomes. We adopt a broad definition of TPU that encompasses both the legislative and regulatory processes, and we perform tests to validate a news-based measure of TPU that is consistent with this definition. In supplemental tests, we document an increase in analyst forecast dispersion during periods of high TPU, indicating the effects of tax policy uncertainty extend to sophisticated market participants. We also document that the effects of TPU are concentrated in systematic volatility. Overall our results suggest that uncertainty surrounding tax policy can impose real costs on investors.

Keywords: tax policy uncertainty, economic policy uncertainty, return volatility

JEL Classification: H25, H32, G18, M41, D72, G12

Suggested Citation

Brown, Jennifer L. and Lin, KC and Moore, Jared A. and Wellman, Laura, Tax Policy Uncertainty and Stock Return Volatility (January 20, 2017). Available at SSRN: https://ssrn.com/abstract=2348414 or http://dx.doi.org/10.2139/ssrn.2348414

Jennifer L. Brown

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States
(480)965-6618 (Phone)
(480) 965-8392 (Fax)

KC Lin

Central Michigan University - College of Business Administration ( email )

Mt. Pleasant, MI 48858
United States

Jared A. Moore (Contact Author)

Western Washington University ( email )

Bellingham, WA 98225-9071
United States
360-650-6252 (Phone)

Laura Wellman

Pennsylvania State University ( email )

378 Business Building
University Park, PA 16802
United States
6026225683 (Phone)

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Penn State University ( email )

University Park, PA 16802-3306
United States

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