Do bank stock prices efficiently reflect the information content in a key tax reform event?

Abstract

This study examines the behavior of bank stock prices in Jordan in relation to a significant tax reform event. We analyze a sample of all banks listed on the Amman Stock Exchange to study the market response to the Amended Income Tax Law 2018. In the proposal period, investors were anticipating a mandatory tax increase of 5%, though the enacted law differed from expectations by implementing only a temporary, slight tax increase of 3%. Our findings reveal that there are higher stock returns observed during the post-approval period of the Amended Income Tax Law 2018 compared to the pre-approval period. This holds for both individual stocks and portfolios, indicating a positive market response to the tax reform. This paper contributes to the existing body of literature that examines pricing anomalies. The findings of this study indicate that when a tax bill is passed with a corporate tax rate lower than the proposed level, it creates a positive earnings surprise. However, the market displays inefficiency in promptly revising its expectations, resulting in a delay in the stock return pattern. This suggests that there is a discrepancy between the market's reaction as implied by the efficient market hypothesis and the actual impact of the tax reform on bank stock prices.

Keywords

• Tax reform
• earnings surprises
• bank stocks
• market reaction
• market efficiency
• Accounting