Abstract:
This thesis investigates the effect of a corporate tax rate change on the share market. Based on Givoly and Hayn (1992), I examine how a decrease in the corporate tax rate affects the New Zealand share market focusing specifically on the effects on deferred tax liabilities. Deferred taxes have been an issue of vigorous debate throughout the years with the crux of the argument being whether deferred tax liabilities are “real” liabilities or are they just an accounting fiction. Taking a sample of 167 New Zealand listed companies, I use the 2007 announcement of the decrease in the corporate tax rate and the 2008 effective date of the decrease in the corporate tax to find out whether the New Zealand share market views deferred tax liabilities as “real” liabilities. Using a least squares regression similar to Givoly and Hayn (1992), I find evidence that deferred tax liabilities are viewed as “real” liabilities and thus have value relevance. However, in regards to the timing and likelihood of deferred tax reversals and their effect on equity, the results are mixed. The main variable of interest is the reduction in the deferred tax liabilities caused by the decrease in the corporate tax rate, which is positively related to the share prices. This result is consistent with the finding in Givoly and Hayn (1992), and both sets of results support the view that deferred tax liabilities are “real” liabilities.
