Sweden's Got a Brand New Tax Rate

Abstract: In this paper, we intend to investigate the Swedish stock market's reaction upon the acceptance of the 2018 corporate tax rate reduction. The purpose is to examine if there was a significant stock market reaction and if it was heterogeneous across sub-samples based on market capitalization. We discover a potentially significant stock market reaction on the acceptance day and we find support that it was heterogeneous across sub-samples. This indicates the importance of examining different sub-samples of firms to better understand the implications of a reduction in the corporate tax rate. To further investigate the significance of the reaction, we perform a permutation test and several robustness checks. The results indicate that the initially observed reaction is likely due to noise or difficulties in distinguishing the reaction from other interfering events, given the small magnitude of the tax rate reduction. This suggests that future researchers should focus on larger tax changes to be better able to distinguish the reaction from noise to derive meaningful results.