Dividend Withholding Tax Reforms: A Comparative Analysis of Market Responses in Norway and Finland

Abstract

This master thesis investigates the dividend withholding tax reforms in Finland and Norway and their impacts on foreign investments and corporate dividend policies. Utilizing a difference-in-differences analysis, this study compares the effect of these reforms on dividend payment policies of domestic companies by analyzing data from 2015 to 2022 against other Nordic countries. An event study examines stock market reactions through mean cumulative abnormal return in both countries around the announcement dates of the new systems. Data from the International Monetary Fund was used to investigate the effect on equity owned by foreign investors in Finland and Norway.

The results indicate that Finland's implementation of the TRACE system led to a notable decrease in domestic firms' dividend distributions. In contrast, no significant change was observed in Norwegian firm’s dividend distribution, implying that there might be a negligible effect of the tax reform on dividend policies or a latent impact not yet evident. The market reactions to both countries' reforms showed a short-term negative response. For foreign portfolio investment there was varied regional responses in the years after the reform, but no clear-cut evidence suggesting a widespread reaction. These findings suggest that while tax reforms aim to simplify the investment process for foreign entities, their influence on market behavior and investment strategies may be limited.

This thesis contributes to the understanding of how tax policies affect international investment decisions and the economic behavior of domestic firms in the context of global financial markets. The evidence presented sheds light on the complex interplay between tax legislation and market dynamics.