Publicity over corporation tax doesn’t lead to share price falls

Companies with high effective tax rates are perceived as less risky by investors

If negative publicity surrounds a UK company’s corporate tax payments, that company will not necessarily suffer a fall in its share price. The exception is when a company is linked with a more serious issue that may be unacceptable to the revenue authorities.

This finding is from a new study from Henley Business School, part of the University of Reading. Nevertheless, the study also found that when all else is equal, companies that have high effective tax rates will be perceived as less risky investments by shareholders.

As part of a wider multi-stakeholder study, the authors examined newspaper stories covering tax avoidance between January 1991 and October 2014. They then linked these with the share prices of the businesses in question for a period of three months after the breaking news. While the following two to three days after the story saw a fall in price, the general trend was an upturn of 0.8% in the two-week period following the news story.

The authors offer two possible explanations for this. The first is that share prices are positively influenced by any kind of news (good or bad). The second is that heightened public relations and marketing efforts by the companies involved more than cancel out the effects of bad publicity.

The report also examined the rate of total corporate tax payments in the UK since the early 1990s and found that they have remained more or less at the statutory rate, indicating that the common public perception of endemic tax avoidance in the UK is unfounded.

Henley’s research involved interviews with more than 60 people from industry, business, consumer bodies and non-governmental organisations (NGOs) in addition to a quantitative analysis of key financial metrics relating to tax and share prices.

The authors of the study argue that the disparity between actual tax activity by UK companies and the public’s perception of it (which was revealed by the interviews) means that UK companies need to be more transparent.

Being labelled as a tax avoider can cause reputational damage among some stakeholder groups, and is most likely to be frowned upon by consumer bodies and NGOs. Interestingly, respondents across all stakeholder groups (business leaders, industry representatives, NGOs and consumer bodies) felt strongly that, ultimately, responsibility for the setting, implementation and policing of issues of fairness regarding tax lies with the government.

Respondents also believed that the international tax system introduces complexity and contributes to a feeling of an unfair playing field between UK companies and multinationals domiciled elsewhere.

Henley Business School professor of organisational psychology, Carola Hillenbrand, said: “Firms must acknowledge their long-term reputation depends on more transparency and simpler communication about their tax activities. We find that there is a sense of mistrust from public bodies towards business, and tax has become a key part of that mistrust. Companies have a unique opportunity to engage with the public and demonstrate that stakeholder views do matter in business.”

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