Election-Day Market Reactions to Tax Proposals: Evidence from a Close Vote

Masanori Orihara ()
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Masanori Orihara: Department of Policy and Planning Sciences, Faculty of Engineering, Information and Systems, University of Tsukuba

No 2219, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: We ask whether the stock market immediately reacts to the underlying will of political leaders to tax shareholders from the moment of their election, much earlier than previously documented. Our natural laboratory is the surprising outcome of the September 2021 Japanese Prime Ministerial election: whereby the winning candidate secured a narrow victory of just one vote and thus promoted a second “runoff” election. The eventual election victor—Fumio Kishida—proposed increasing taxes on shareholders, leading to a market drop referred to as “Kishida Shock” by news outlets such as the Financial Times and The Wall Street Journal. Using an event study approach, we find firms that were vulnerable to a potential tax increase, such as dividend payers, experienced lower stock returns. As predicted by financial constraints theory, smaller firms with more cash holdings could lessen their losses. Likewise, larger firms could reduce the severity of their negative stock returns via bond market access. As a direct target of the potential tax increase, it appears that domestic individual investors sold their highdividend yield stocks while foreign investors in fact purchased shares of the same.

Keywords: Taxation; Election; Financing; Ownership Structure; Dividend; Japan (search for similar items in EconPapers)
JEL-codes: G32 G35 G38 H24 H25 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2023-03
New Economics Papers: this item is included in nep-fmk, nep-pbe and nep-pol
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