Banks stock market reaction to the Italian and Spanish windfall tax announcement: an event study

This paper analyses the Eurozone banks’ short-term market reaction to the introduction of windfall tax in Spain and Italy. Using an event study, I show that stocks react significantly negatively to the windfall tax announcements. The drop was more pronounced for Spanish and Italian banks, which were directly affected by the measure. According to the cash flow hypothesis, an increase in tax burdens/liabilities significantly affects the bank’s cash flows and profitability, leading to a decline in the bank’s market value. High-tax, small, operationally efficient, and profitable banks with high institutional ownership show higher negative abnormal returns to the measure announcement.