Blog 5

Investors’ reactions to country-by-country reporting

A team of researchers from University of Mannheim and ZEW Mannheim, including Johannes Voget and Katharina Nicolay, investigated the capital market reaction to the introduction of the public country-by-country reporting (CbCR) requirement for EU financial institutions in 2013. Their results based on their full sample of financial institutions headquartered in the EU suggest no response from investors. However, sample splits reveal heterogeneity in the capital market reaction across subsamples of banks with different characteristics. Voget and Nicolay explain these results and the relevance of their study in light of the ongoing debate on whether or not to require large multinational firms in the EU to adopt country-by-country reporting, below.

We aimed to provide a more general understanding of how tax reporting requirements are perceived by investors. The introduction of a CbCR requirement for EU financial institutions in 2013 (see Infobox) implies that more tax-related information is available to stakeholders and the general public. To assess the consequences of the new legislation for the companies’ future profits, investors have to predict how managers, tax authorities, consumers and the public sentiment will react to such a new requirement.

Our expectations
From a theoretical perspective, we considered the following two opposite channels. On the one hand, you could expect that investors appreciate the upcoming enhancement in tax transparency. It may serve as a tool to better monitor tax avoidance activities of firms, thereby impeding private rent extraction by firm owners. This decrease in information asymmetry between managers and shareholders could trigger a positive stock price response. On the other hand, investors might react negatively because they expect a decrease in banks’ future profits. Previous studies on the introduction of similar tax transparency measures suggested a negative capital market response, which we therefore also expected to find. The reasoning for a negative response from investors is as follows. First of all, financial institutions may reduce their profit shifting since the additional information allows tax authorities to detect tax avoidance behavior more efficiently. Companies will therefore be paying more taxes and exhibit lower after-tax profits. Similarly, their reputation may be at stake; an increase of public scrutiny may stimulate banks to voluntarily pay their “fair share of taxes”. Moreover, the new reporting measure may lead to an increase in both direct costs, e.g. for the adjustment of the reporting system and the compilation of the reports, and indirect costs resulting from reputational damages.

Overall stock price reaction
In order to determine the reaction of investors, we employed an event study. The intention to introduce a new reporting requirement was announced on 27 February 2013 and emerged quite as a surprise. This date therefore marks the key event date of our study. We examined the capital market response, in terms of stock prices, around this day. Our overall sample showed neither a positive nor a negative response from investors. We extended our analysis by additional event dates and robustness tests, leaving our overall results unchanged. ​


Prof. Dr. Johannes Voget

Project A05: Accounting for Tax Complexity

Project B07: Costs and Benefits of Tax Transparency

Johannes Voget holds the Chair of Taxation & Finance at the University of Mannheim. His research interests cover international taxation, corporate finance and public finance. Prior to joining the University of Mannheim, Johannes Voget held a position as Research Fellow at the Oxford University Centre for Business Taxation, with which he is still affiliated as a Research Associate.


Prof. Dr. Katharina Nicolay

Project B07: Costs and Benefits of Tax Transparency

Katharina Nicolay is assistant professor for accounting and taxation at the University of Mannheim. Her research interest cover topics of international business taxation, empirical tax research, evaluation of tax reforms, and tax accounting. She is also a researcher at ZEW’s Research Department “Corporate Taxation and Public Finance” and one of two coordinators of the Leibniz ScienceCampus “MannheimTaxation”.

Country-by-country reporting is a measure to limit extensive profit shifting activities. Article 89 of the Capital Requirements Directive IV (Directive 2013/36/EU) requires EU credit institutions and investments firm to publicly disclose turnover, the number of employees, profit or loss before tax, tax on profit or loss and public subsidies received on a per-country basis as well as the name, location and nature of activities of their subsidiaries and branches. Groups headquartered in the EU have to provide a CbCR with respect to the whole group, whereas groups headquartered outside the EU only have to disclose information on their EU entities, including their subsidiaries and branches.

We employed an event study methodology. For our main specification, we used ownership information provided by the Orbis Bank Focus database to construct a sample of listed entities of bank groups whose global ultimate owner is located in the EU. We merged the ownership information with daily stock prices from Datastream/Eikon for the period from January 2012 to December 2014. Our final main sample included 155 listed banks.

In Project B07 we (Jens Müller, Katharina Nicolay and Johannes Voget) focus on the interplay between voluntary and mandatory tax reporting that jointly determine tax transparency, answering the question:

How does mandatory and voluntary tax reporting affect tax transparency, and how does the resulting tax transparency affect profit shifting and firm value?

By establishing a holistic view of tax transparency, we strive to understand what drives the decision of firms to become tax transparent and to assess its consequences. Using data from voluntary as well as mandatory tax-related disclosures such as the newly required country-by-country reporting, we will enhance our understanding of the role of tax transparency, the costs and benefits of tax disclosure, and the interplay of tax and financial accounting in shaping firm behavior and ultimately the transparency of publicly listed firms.

The effects cancel out
When splitting our sample, however, we found that the reaction is slightly more negative for banks that are engaged in selected tax havens and for banks with an above-average business-to-consumer orientation, and slightly more positive for banks with a below-average share of institutional investors. Based on these results and prior literature, we conclude that investors anticipated both a reduction in banks’ tax avoidance opportunities and a decline in information asymmetries between managers and shareholders. These two different channels trigger both negative and positive capital market reactions, but as they cancel each other out, they lead to an average overall effect of zero.

Our findings are especially relevant for policymakers deciding upon the implementation of additional tax disclosure rules. Taking together our results and previous findings on investor reactions to new tax transparency measures, we conclude that capital market reactions to increases in tax transparency depend crucially on the exact design and objective of the initiative. Compared to the CbCR for EU financial institutions, the current proposal by the European Commission and the European Parliament for a public CbCR for all multinational firms in the EU with profits above a certain threshold, provides for a more salient way of disclosure and a more comprehensive list of reportable items. This could further increase the effectiveness of the CbCR in preventing tax avoidance and thereby affect the perception of the disclosure requirement by investors.

The paper will be complemented by a further study on the additional insights that CbCR data provides with respect to the tax planning activities and the tax haven usage of EU financial institutions compared to conventional datasets.

Read the Publication “Increasing tax transparency: investor reactions to the country-by-country reporting requirements for EU financial institutions” by Verena K. Dutt, Christopher A. Ludwig, Katharina Nicolay, Heiko Vay and Johannes Voget in International Tax and Public Finance, published online: 



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