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

Author

Listed:
  • Masanori Orihara

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

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.

Suggested Citation

  • Masanori Orihara, 2023. "Election-Day Market Reactions to Tax Proposals: Evidence from a Close Vote," Working Papers 2219, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:2219
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    References listed on IDEAS

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    More about this item

    Keywords

    Taxation; Election; Financing; Ownership Structure; Dividend; Japan;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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