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The Immediate Impact of Tax Reform on Corporate Earnings: Investor Expectations and Reactions

Friday June 1, 2018

Abstract

How quickly did investors react to the transitory earnings impact of the Tax Cuts and Jobs Act (TCJA)? We examine this question by considering whether investors could anticipate TCJA’s transitory earnings impact and if investors use those estimates to re-assess stock valuations for S&P 500 corporations. We also quantify TCJA’s material impact on corporate earnings and find significant variation. Approximately half of firms in the S&P 500 had earnings increases due to the enactment of TCJA, and approximately half had earnings decreases. Among firms that receive an increase to earnings, 75 percent of net earnings were attributable to TCJA. For firms that recorded decreases in net earnings, the negative amount attributable to TCJA turned cumulative pretax profits into after-tax losses. Using publicly disclosed amounts for deferred tax balances and permanently reinvested earnings, we show investors could estimate TCJA’s earnings effect. Consistent with investor anticipation, we find investors react to the immediate earnings impact of TCJA at its passage in Congress. However, we also find some delayed investor reaction because investors reacted to the earnings impact of TCJA at its ultimate enactment.

Citation

Koutney, Colin Q. and Mills, Lillian F., The Immediate Impact of Tax Reform on Corporate Earnings: Investor Expectations and Reactions (June 2018). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2720464