Tax avoidance regulations and stock market responses

In this paper, we examine the impact of tax avoidance regulations on the stock market behavior of multinational corporations (MNCs). We use the introduction of the worldwide debt cap reform in 2010 in the UK that limited the extent of profit shifting for a group of multinational firms as a quasi-natural experiment. We find that MNCs affected by the reform have higher stock market returns than unaffected MNCs after the reform. The results are driven by firms with lower quality of corporate governance and firms with access to tax haven affiliates. Further, the affected MNCs also see extremely negative returns less frequently than before the reform. Our findings are consistent with the notion that anti-tax avoidance regulation is perceived by investors as a tool to help curb aggressive tax planning and improve information transparency, especially in environments where this transparency is lower.