Study finds Chinese companies suffered between $237 and $300 billion in market losses; Japan and Germany saw sizable benefit; South America was biggest foreign winner

The passage of U.S. tax reform legislation in 2017 had an effect not only on companies based in the U.S., but on foreign firms as well, with Chinese companies seeing the biggest negative impact and companies in South America generally benefiting, according to a new study that looks at daily stock market returns around key dates leading up to the passage of the Tax Cuts and Jobs Act of 2017 (TCJA).

The study, “Making Only America Great? Non-U.S. Market Reactions to U.S. Tax Reform,” was authored by Jeff Hoopes from the University of North Carolina’s Kenan-Flagler Business School, Fabio Gaertner from the University of Wisconsin-Madison and Brady Williams from the University of Texas at Austin.

The study used Google Trends data to locate key dates of heightened attention to tax reform developments. The authors identified six dates, beginning on September 27, 2017 and ending on December 20, 2017, with clear increases in online searches for “tax reform” that corresponded to significant developments in the legislation.  On these dates, plus or minus one day, Chinese companies in the sample experienced between $237 and $300 billion in decreased market value. On those same dates, companies in Japan and Germany saw modestly positive returns.  Companies based in South America – Peru, Chile, and Brazil, for example – experienced the largest positive returns.

“One of the stated goals of tax reform was to increase the competitiveness of U.S. companies, particularly in manufacturing,” said Hoopes, an assistant professor of accounting. “Our research found evidence to support this outcome, in particular with regard to China, one of the country’s biggest competitors in manufactured goods.”

Complex interactions

The Tax Cuts and Jobs Act was billed as necessary to make U.S. firms more competitive in an increasingly challenging global landscape. The act reduced the U.S. corporate tax rate from 35% to 21%, and its passage was generally welcomed by investors, who drove domestic stocks higher in the period leading up to and following its enactment.  To date, academic studies assessing the winners and losers from the act have generally focused on stock market returns for U.S. companies.  This new study recognizes that markets are global and that tax reform in the world’s largest market also has repercussions for both non-U.S. firms and foreign companies with operations in the United States.

Using data from Compustat Global, the authors examined a sample that included more than 19,000 foreign firms representing about $23 trillion in market value.  The study included approximately 2,800 firms based in Japan, India and China, while Australia and South Korea were represented by about 1,400 firms each. Thirty-four other countries made up the balance.

In the aggregate, the study found little average impact on foreign company stock prices in the periods examined. While U.S. firms were up a total of 3.6% over the six periods included in the study, foreign stocks were up just 0.6%.  This is because, although firms from most countries benefitted, those from some countries, such as China, lost big. For example, in fabricated products, U.S. firms experienced average returns of 5.88%, and corresponding foreign firms saw gains of 2.99%, but Chinese firms lost 7.53% over the same time period.   U.S. steel, mining and business equipment experienced the largest increases, with cumulative stock returns between 4% and 10%.  Hoopes noted that the negative impact on the fabricated products sector in China was consistent with the idea that tax reform was designed, in part, to revive U.S. manufacturing.

On a country level, the biggest foreign tax reform winners included companies in Peru, Chile and Brazil.  Japan and Germany, two major U.S. trading partners, also saw sizeable stock price increases.  Returns were more muted for Mexico and Canada, averaging about 1% each across the six-event period.  Great Britain was modestly positive, as was France.

Hoopes noted that there are several ways foreign companies might have benefited from the TCJA. “In a globally integrated market, foreign firms with U.S. operations can also take advantage of lower taxes,” he said.  “In addition, higher growth rates in the U.S. could lead to increased demand from U.S. companies for intermediary goods from foreign suppliers.  Finally, the increased competitiveness of U.S. suppliers could result in reduced costs for non-U.S. purchasers of those goods, indirectly improving cash flow.”

Hoopes said of the study results, “We found some obvious losers – Chinese manufacturing, for example – but also some surprising winners, like foreign automobile manufacturers.”  He added that “the interaction of factors determining winners and losers post-tax reform” surfaced by the study highlights what economists have long recognized – the elaborate complexity of the global economy.

Access the complete paper HERE.

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