Effects of Tax Law Revisions Related to Individual Shareholders’ Investment Profit on Stock Market
Asian Tax Journal Vol. 23 No. 1 (2022), pp. 9-38
Abstract
Although the effect of tax laws revision related to individual investors’ after－tax investment profit on stock reaction is a matter of interest to investors, capital market participants and the taxing authority, it has been hardly investigated enough due to the restriction of data access. Based on collected shareholder stake data of listed companies that appointed the Korea Securities Depository (KSD) as a stock transfer agency, this study analyzed the feature of stock reaction on various event dates related to processes of relevant tax laws revision, which gradually expanded the scope of individual shareholders who bear capital gain tax burdens, around 2013, 2016 and 2017. The results of this study shows that, first, in the tax laws revision process around 2013, substantial tax capitalization effect was found after the date of issuance of tax laws revision plan, especially in the companies whose ratio of major individual shareholders is relatively high (“higher individual－shareholders companies”, hereafter). Furthermore, significant tax capitalization effect was also found after the date of confirmation of tax laws in the companies whose ratio of major individual shareholders is relatively low (“lower individual－shareholders companies”, hereafter), which implies that the tax capitalization effect could not take place fully to the companies of little interest in capital market, and thus occurrence of original effect could be delayed by the next event date. Next, in the tax laws revision process around 2016, substantial tax capitalization effect was found after the date of issuance of revenue rulings revision plan in the lower individual－shareholders companies, which is not consistent to the results of previous tax laws revision, and the effect was much higher in the companies which do not pay dividends (“no－dividend companies”, hereafter). Those results imply that increased tax burden from both strengthening comprehensive taxation of financial incomes and expanding the scope of major shareholders could enhance the tax capitalization effect additionally to relevant companies. Finally, in the tax laws revision process around 2017, substantial tax capitalization effect was found after the date of issuance of tax laws revision plan in the no－dividend companies. Furthermore, the lock－in effect was found after the date of issuance of revenue rulings revision plan in those companies, which implies that tax evasion through temporarily lowering the market value around year－end is prevalent among capital market participants.
Keywords
- Tax laws revision
- Stock reaction
- Tax capitalization effect
- Korea Securities Depository
Related Articles
The Study on the Improved Grant for Autonomous Districts of Local－Tax Reform －Focus on Incheon Metropolitan City－
12(2) 383-408
Evaluation of 2010 Tax Reform according to IFRS Adoption in Korea
12(1) 45-87
A Study on Corporate Tax Complaint and Stock Market Response
22(3) 133-152
Value－Relevance of Milestone Disclosures by High－tech Growth Firms
20(5) 129-163
The Impact of Corporate Social Responsibility and Corporate Governance on the Market Reaction to the Disclosure of Tax Penalty
20(1) 9-39