AD ALTA
JOURNAL OF INTERDISCIPLINARY RESEARCH
companies can achieve a significant competitive advantage when
they use a risk management strategy. Companies that use
hedging derivatives and hedge accounting have better market
growth opportunities, lower transaction costs and less volatility
in the accounting profit or loss. Hedging strategies represent an
opportunity to reduce transaction costs and indebtedness. Our
analysis showed that a 1% increase in the tax rate would lead to
a decrease in derivative assets by 0.083%. It may indicate that
hedging operations use predominantly daily and short-term
trading. If derivative instruments were taxed, their trading
volume would be reduced and the stability of cash flows and the
protection of the accounting profit against market risks would be
jeopardized. This area does not provide enough evidence in the
literature. For example, Kalaitzake (2017), Davis et al. (2013)
and Oxera (2011) examine the effect of FTT on the interest rate
and currency risk in the financial sector and on the real
economy. They state that a transaction tax increases transaction
costs and limits the ability to effectively manage risks in the
investment portfolio.
Debt financing can become more expensive for companies,
which can lead to excessive speculative transfers of investments
from debt to equity instruments (e.g. through convertible
instruments), or to transfers of financial sources between the
Member States that do not have these instruments taxed. The
potential risk of tax avoidance on debt instruments may be that
companies will use more financing through intermediaries and in
the form of bank loans that are exempted from transaction tax.
(PwC, 2013)
However, the tax base of the French FTT does not consider
derivatives and operations with derivative instruments. In our
opinion, in the case of taxation of financial transactions,
derivatives should not be subject to this tax, as they improve the
development of financial markets and contribute to the creation
of liquidity. If derivative transactions were subject to FTT, the
financial stability of companies' cash flows would be jeopardized
on the one hand, and the tax would represent a risk of increasing
transaction costs and restricting trading in derivative instruments
on the other hand. Schäfer (2015) states that exemption of
derivatives encourages traders to circumvent the tax through
instrument arbitrage. Therefore, the FTT model including
derivatives seems to be unsuitable for achieving the main
objectives of the FTT.
Based on our analysis (Fig. 1), the real effect of FTT has
increased the value of price and reduced market volume. Also,
before FTT became effective, there was a higher fluctuation in
the development of the French index, while after the tax
introduction was the situation on the financial market stabilized.
In comparison with studies, Colliard & Hoffmann (2017) found
that after FTT, there was a decrease in trading activities with
financial assets by 10%, affecting an overall drop in trading
activities. Becchetti et al. (2014) focus on the impact of tax
introduction on liquidity, intraday volatility, and volumes of
stocks. They also state that FTT significantly reduces market
volume comparing with non-taxed shares.
Figure 1: The real effect of FTT on trading volume and price of
the French index CAC40 (a comparison of 2011 and 2013)
Source: authors’ calculation
As FTT is associated with a market volume of financial assets,
we assumed that a decrease in volume will reduce tax revenues
in the state budget (Fig. 2). However, after 2013 tax revenues
rose even though a market volume reduction. We must
emphasize that we compared the whole index, not only shares
with a market capitalization above EUR 1 billion as the French
measure required. To conclude, FTT can improve the stability of
financial markets after the crisis and prevent against market
fragmentation, but this relationship is necessary to examine in
more detail.
Schäfer (2015) estimates the tax revenues for EU countries and
based on results from France, Italy, and Germany states that FTT
with a broad tax base can provide substantial revenues. The
broad tax base can achieve considerable tax revenues even if the
tax rates of FTT are lowered. This study also points out that
small countries may lose significant amount of revenues because
FTT is associated with the taxation of securities issued in
residential country.
Figure 2: The relationship between FTT revenues and volume of
CAC40 (2007-2018)
Source: authors’ calculation
To show the real impact of FTT, we compare the French stock
market with the German stock market, and we wanted to verify
the effect of tax on taxed and non-taxed markets. The results
showed (Fig. 3) that the FTT can influence market volume
negatively. The trend of development of the French market is
declining, while the trend of the German market without taxation
is rising in the long-term horizon. So, financial transaction tax
can lead to limitation of trading on the financial markets, but it is
necessary to consider also other indicators, such as transaction
costs, price efficiency, or market liquidity.
Figure 3: Volume in French market (CAC40) and German
market (DAX) (moving average, mil. EUR; 2011-2019)
Source: authors’ calculation
Based on regression analysis and empirical studies, we can
summarize that the issue of FTT in the context of financial
markets is important to evaluate for the following reasons:
a)
to develop risk management strategies and the ability of
companies to hedge the stability of cash flows or fair value
of financial assets, as well as to contribute to the overall
stability of the financial sector.
b)
to identify the impact of the tax on debt financing, bond
yields and transaction costs in the context of corporate
indebtedness.
c)
to identify and understand the behaviour of companies in
the market and the influence of market makers (e.g.
financial institutions) on the microstructure of the capital
and debt markets.
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