Investor Reactions to Treasury Regulations: The Case of GILTI

ABSTRACT We examine the firm value effects of Treasury Regulations, a powerful source of tax law that prior research has largely overlooked. The hasty enactment of the Tax Cuts and Jobs Act (TCJA) left interpretive gaps for Treasury to fill. We employ Treasury Regulations related to the TCJA’s Global Intangible Low-Taxed Income (GILTI) provisions as an identifiable setting that impacts many firms. We predict that investors will react negatively (positively) to regulations that investors expect to increase (decrease) firms’ future tax burdens or the uncertainty thereof. We identify firms affected by GILTI through their disclosures and find significant market reactions for these firms around the issuance of Treasury Regulations related to the GILTI provisions. Importantly, we find that these reactions vary cross-sectionally on observable characteristics and that institutional investors drive these reactions. The study improves our understanding of how administrative law shapes tax policy by documenting shareholder reactions to Treasury Regulations. Data availability: All data used in the manuscript is publicly available.