Effects of Bush Tax Cut and Obama Tax Increase on corporate payout policy and stock returns

Abstract This article analyzes the effects of the American Taxpayer Relief Act of 2012 (Obama Tax Increase) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (Bush Tax Cut) on corporate payout decision and stock returns. Logit and fixed-effect panel data analyses are conducted on all firms listed in NYSE, Amex and NASDAQ in the announcement windows of two, three and four quarters before and after the tax reforms. The results show that the implementation of these tax reforms more persistently affects dividend payments than stock repurchases. It also has a boosting effect on stock returns in the Bush Tax Cut that is 75 % greater than their reducing effect in the Obama Tax Increase, in absolute terms, controlling for dividend payment and stocks repurchase. These effects are robust to different market capitalization sizes. Less solvent firms persistently spend larger dollar amounts in stock repurchases, especially in the announcement of the Bush Tax Cut (+1.11 % per solvency ratio percentage in the [−2Q, +2Q] window). Insolvency is more often significant and with positive impacts on stock returns in the Obama Tax Increase, suggesting that some investors decide to migrate to leveraged-high-growth firms once they realize that some dividend-paying firms could change their dividend policies

Government size and openness: Evidence from the commodity boom in Latin America

Does government size increase to compensate for the volatility that arises from openness? We evaluate this compensation hypothesis by focusing on Latin America, whose economic growth in the 2000s has been often attributed to the commodity boom. Panel data regressions show that during the 2003-2010 commodity boom terms of trade volatility has positive effects on government size compared to the earlier 1990-2002 period. This key finding supports the compensation hypothesis, a result robust to dynamic panels allowing for reverse causation from government size to the real economy. Policy implications include diversification of the production structure and strengthening of regulatory framework

Institutions: Key variable for economic development in Latin America

This article examines economic development from 1996 to 2015 for 192 countries and specifically Latin America. Evidence shows that each 0.1-point increase in institutions impacts a 3.9% improvement in Latin American per capita output versus a 2.6% effect on world development. This new evidence from Latin America shows a missing opportunity to develop at higher annual pace than the 2.14% average, mainly due to the deterioration in rule of law. We conjecture the efficiency of monetary/fiscal policies will improve if policymakers emphasize projects that foster improvements to institutional quality, such as transparency, public spending quality and fiscal responsibility

The impact of exports to China on Latin American growth

This article analyzes the relationship between GDP growth in seven major Latin American countries and China’s demand for their exports. GLS panel estimation using annual data for the period 1994-2013 shows that the relationship was both statistically and economically significant. Control variables found to be significant in positively affecting GDP growth include the investment-to-output ratio, the exchange rate, and the terms of trade, and, in negatively affecting it, population growth and the unemployment rate. Consistent with recent literature, foreign direct investment was found not to be significant. A sharp drop in exports to China for many of the countries in the sample in 2015 raises questions about the region’s vulnerability to China’s growth slowdown

Three Essays on Economic and Financial Development in Latin America: Evidence from the 2000s Commodity Boom

The dynamic forces of commodity prices have become a subject of large interest due to the uprise of a commodity supercycle in the beginning of the 21st century. The main purpose of this dissertation is to assess the role of commodity shocks and international trade in Latin American financial and economic development in the last two decades. The first essay examines how commodity market structural shocks explain the variations in commodity prices. Structural Vector Autoregression (SVAR) results from 1997 to 2015 show that aggregate demand shocks are more evident during the recent commodity boom period and are robust to different time spans and selection of commodities. The second essay analyzes the impacts of those commodity market structural shocks on Latin American stock markets. I select stock exchange benchmark indices and individual firm stock prices to test the responses of the region’s stock markets to supply, demand and idiosyncratic shocks to commodities that correspond to the largest listed firms in Latin American stock markets. Results are consistent with the hypothesis that aggregate demand shocks play a larger role in Latin American real stock returns during the commodity boom period as compared to the pre- and post-boom periods for all commodity markets. The third essay investigates the relationship between international trade and economic growth in 14 Latin American economies from 1997 to 2014. Fixed effects panel data regressions adopting an endogenously-determined threshold estimation method examine for evidence of nonlinearity related to the increased economic volatility in the period, especially due to the 2000s commodity boom. The strong trade-growth nexus is robust to different time spans, selection of countries and controlling for the 2008-2009 financial crisis. Two-stage least squares (2SLS) regressions add robustness to results while addressing the potential endogeneity in the trade-growth relationship

Threshold Effects of Terms of Trade on Latin American Growth

This paper investigates nonlinear relationships between terms of trade volatility (totvol) and economic growth in 14 Latin American economies from 1997 to 2014. In the 2000s, Latin American countries experienced accelerated economic growth often attributed to commodity price booms. We split the sample into two regimes based on totvol thresholds determined by bootstrap techniques. Fixed-effects, instrumental variable and dynamic panel regressions address endogeneity in trade-growth, subject to traditional economic channels such as domestic investment, population growth, exchange rate, government size, and institutions. We find statistically significant thresholds and stronger trade-growth links during the 2000s commodity boom and in larger economies

Democracy in Emerging Markets: A New Perspective on the Natural Resources Curse

Using annual data from 1980 to 2014, we reexamine the relationship between democracy and natural resources for a large sample of emerging market economies. Controlling for human capital (or real GDP per capita) and openness measures, dynamic panel methods address endogeneity from more democratic regimes demanding better control of rents. We find that democracy responds positively to natural resource rents in GDP (NAT) and negatively to terms of trade (TOT). The NAT positive effects mitigate the negative impact of TOT on democracy and holds well in different specifications. By building on a literature focusing on oil rents, increases in NAT (extra revenue over production costs) represent a windfall for mining companies. This leads society to require higher levels of participation in decisions to exploit these rents more transparently. We also find that diversification of rents helps democracy, especially in economies with high shares of oil rents

Economic growth before and after the fiscal stimulus of 2008–2009: the role of institutional quality and government size

Governments implemented fiscal stimulus packages to alleviate the global financial crisis of 2007–2009. Using annual data from 1996 to 2019, we investigate economic growth in a large sample of countries for pre-and post-Global Financial Crisis years. Our approach analyzes the interaction between institutional quality and government size (government expenditures as share of GDP), reinforced by threshold estimations. We document that economies react to government size depending on the quality of the institutions in question. First, fixed effects models indicate higher institutional quality has positive effects on growth, while government size—and its interactions with institutional quality—has negative effects. Second, the coefficients of government size on economic growth are negative with higher institutional quality and become larger in the post-Global Financial Crisis years. These combined results indicate that higher-quality institutions make economies less tolerant of rising government expenditures than lower-quality institutions. Our main findings support institutional quality as the channel through which fiscal policy has real effects. The evidence herein is robust to measures of institutional quality from different databases

COUNTRY-SPECIFIC INVESTOR ATTENTION AND ADR MISPRICING

This paper examines the effect of country-specific investor attention on ADR mispricing. Investor attention is measured by the amount of traffic a country’s Wikipedia profile page receives. A two-stage least squares (2SLS) regression is employed to examine the relationship between investor attention and ADR mispricing, but also to mitigate endogeneity between the two variables of interest. We use the FIFA World Ranking (country soccer ranking) and the number of UNESCO heritage sites as instruments for investor attention; given the unlikelihood that either of those variables can be caused by ADR mispricing. Our results show that lower levels of investor attention lead to higher ADR mispricing, therefore leading to a greater divergence of the law of one price for the sample of ADRs.  The results are robust across various model specifications and to well-known determinants of mispricing such as turnover, stock prices, exchange rates, and market capitalization