Tax Rates and Stock Returns

Abstract

This article presents results showing that anomalous corporate tax rates may lead to weaker stock returns. Low effective tax rates are associated with markedly weaker future returns. This phenomenon cannot be explained totally by factors such as beta, book to market, size, momentum, or the downturn in technology stocks. This implies that even though the stock market is generally assumed to be “semi-strongly” efficient, financial analysts can pick up important clues on companies' business operations and future stock returns from out-of-the-ordinary tax rates.