Tax Reform, Company Value, and Biden Proposals

Abstract

Federal income tax legislative reforms impact both investors and companies. It is prudent to understand these legislative effects before the next round of tax legislation. This article examines whether announcements regarding the passage of the Tax Cuts and Jobs Act of 2017 (TCJA) affected the value of publicly traded companies. The authors use a multiple-date event study methodology to analyze whether abnormal returns were present for companies in the S&P 500 Index after various announcements of the TCJA’s passage by the US Congress. Results on many of the event dates provide support that the TCJA had a positive impact on company value. They also analyze differences among companies based on dividend practices, multinationality, revenue growth, and effective tax rates. Their findings provide valuable insight as US companies and investors prepare for the possibility of corporate tax changes from the Biden administration.

TOPICS: Quantitative methods, statistical methods, legal/regulatory/public policy, performance measurement

Key Findings

• ▪ Positive and significant cumulative abnormal returns indicate that investors considered the impact of the TCJA to be beneficial for the value of the average S&P 500 company.

• ▪ Dividend-paying companies, domestic companies, and companies with high effective tax rates fared better than their counterparts as the TCJA made its way through Congress.

• ▪ These findings can help investors and companies navigate the tax legislation proposals of the Biden administration.