Tax Reforms, Investor Sentiment and Closed-End Fund Performance

Authors

  • Umesh Kumar State University of New York at Canton

DOI:

https://doi.org/10.47941/ijf.1040
Abstract views: 129
PDF downloads: 139

Keywords:

Tax Reforms, Investor Sentiment

Abstract

Purpose: Tax reforms have a significant impact on asset prices and shareholders’ wealth. The Tax Cuts and Jobs Act 2017 (TCJA) reduces the tax obligations for both households and businesses. This paper investigates the relationship between closed-end funds performance and investor sentiment induced by tax reforms.

Methodology: Two proxies of investor sentiment are used to measure the impact on closed-end fund (CEF) performance.

Results: The results reveal that overall, tax reforms have a positive effect on the closed-end fund valuations. Institutional investors’ sentiment takes a differential view from individual investors on CEF returns. Institutional investors’ sentiment does not show a relationship with fund returns. Medium size CEFs benefit more from tax reforms.

Unique Contribution to Theory, Policy and Practice: Despite mixed signals, the results suggest that TCJA has influenced the investors’ sentiment resulting in excessive optimism.

Downloads

Download data is not yet available.

References

Auerbach, A.J., Hassett, K.A. (2007). The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study.

Baker, M., Wurgler, J. (2006). Investor Sentiment and the Cross-Section of Returns. Journal of Finance. 61, 1645–1680.

Barber, B.M. Odean, T. and Zhu, N. (2008). Do Retail Trades Move Markets? Review of Financial Studies, Vol. 22 No. 1, pp. 1-36.

Barone-Adesi, G., Mancini, L., Shefrin, H. (2014). Sentiment, Risk Aversion, and Time Preferences, Working Paper, Swiss Finance Institute, and Santa Clara University.

Binder, J.J. (1985). Measuring the Effects of Regulation with Stock Price Data. RAND Journal of Economics. 16, 167–183.

Chan, K. Hameed, A. and Lau, S. T. (2003). What if Trading Location is Different from Business Location? Evidence from the Jardine Group”, Journal of Finance, Vol. 58 No. 3, pp. 1221–1246.

Chen, N. X., Koester, A. (2020). Do Analysts Mind the GAAP? Evidence from the Tax Cuts and Jobs Act of 2017. Working Paper.

Cherkes, M., Stanton, R., Sagi, J. S. (2009). A Liquidity-Based Theory of Closed-End Funds. Review of Financial Studies 22 (1), 257–297.

Council of Economic Advisers, 2019. Economic Report of the President.

Davidson, K., 2017. Treasury Secretary Steven Mnuchin: GOP tax plan would more than offset its cost. Wall Street J. Retrieved at https://www.wsj.com/articles/ treasury-secretary-steven-mnuchin-gop-tax-plan-would-more-than-offset- itscost-1506626980

Gaertner, F. B., Hoopes, J. L., & Williams, B. M. (2019). Making Only America Great? Non-U.S. Market Reactions to U.S. Tax Reform. Management Science. 66(2), 687–697

Gadarowski, C., Meric, G., Welsh, C., Meric, I. (2007). Dividend Tax Cut and Security Prices: Examining the Effect of the Jobs and Growth Tax Relief Reconciliation Act of 2003. Financial Management. 36, 89–106.

Graham, J.R. (2003). Taxes and Corporate Finance: A Review. Review of Financial Studies. 16, 1075–1129.

Hvidkjaer, S. (2008). Small Trades and the Cross-Section of Stock Returns. Review of Financial Studies, Vol. 21 No. 3, pp. 1124-1151.

Kalcheva, K., Plecnik, J. M., Tran, H., and Turkiela, T. (2020), (Un)intended Consequences? The Impact of the 2017 Tax Cuts and Jobs act on Shareholder Wealth. Journal of Banking and Finance 118, 1–21

Krugman, P. 2018. Why Was Trump’s Tax Cut a Fizzle? New York Times. Nov. 15, 2018.

Kumar, A. and Lee, M. C. C. (2006). Retail Investor Sentiment and Return Comovement. Journal of Finance, Vol. 61 No. 5, pp. 2451-2486.

Lemmon, M., Portniaguina, E. (2006). Consumer Confidence and Asset Prices: Some Empirical Evidence. Review of Financial Studies 19, 1499–1529.

Miller, M.H., Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares. Journal of Business 34, 411–433.

Mills, L. (1998). Book-tax differences and Internal Revenue Service Adjustments. Journal of Accounting Research. 36, 343–356.

Modigliani, F., Miller, M.H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review. 48, 261–297.

Pastor, L., Veronesi, P. (2005). Rational IPO Waves. Journal of Finance 60. 1713–1757.

Pastor, L., Veronesi, P. (2006). Was There a NASDAQ Bubble in the late 1990s? Journal of Financial Economics. 81, 61–100.

Schwert, W.G. (1981). Using Financial Data to Measure Effects of Regulation. Journal of Law and Economics. 24, 121–158.

Stone, M., 2017. CEOs suggest Trump tax cut may lift investors more than jobs. Retrieved at: https://www.reuters.com/article/us-usa-tax-companies/ceossuggest-trump-tax-cut-may-lift-investors-more-than-jobs-idUSKBN1CV38Q

Wagner, A. F., Zeckhauser, R. J., & Ziegler, A. (2020). The Tax Cuts and Jobs Act: Which Firms Won? Which Lost? NBER Working Paper 27470

Downloads

Published

2022-09-24

How to Cite

Kumar, U. K. (2022). Tax Reforms, Investor Sentiment and Closed-End Fund Performance. International Journal of Finance, 7(4), 71–86. https://doi.org/10.47941/ijf.1040

Issue

Vol. 7 No. 4 (2022)

Section

Articles

License

Copyright (c) 2022 Umesh Kumar

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work’s authorship and initial publication in this journal.