The Stock Market Reaction to the Resource Super Profit Tax

Sinclair Davidson

RMIT University © 2010 Economics, Finance & Marketing 2

Motivation

• In early May the Federal government announced a new mining tax.

• This has caused some serious debate in Australia.

• Former PM Kevin Rudd made the argument

If you look at what’s happening generally with resource stocks over the last month, they’ve basically outperformed the general exchange here in Australia, they’ve outperformed resource stocks around the world.

RMIT University © 2010 Economics, Finance & Marketing 3

Impact of the RSPT

RMIT University © 2010 Economics, Finance & Marketing 4

Impact of the RSPT

• Source: AFR 1 June 2010

RMIT University © 2010 Economics, Finance & Marketing 5

Stock Market Impact

• Event Studies are a classic research tool developed in the Finance discipline

• They allow researchers to control for confounding effects

• They are robust with high power to determine various effects

–Statistically sound

–Randomisation adds statistical power

• They can provide graphic evidence

• They can be incorporated with other statistical techniques such a OLS regression

• Allow great flexibility as the choices about inputs to the test

–Economic

–Statistical

RMIT University © 2010 Economics, Finance & Marketing 6

Stock Market Impact

• The structure of an event study

–Define an event

–Define the event window

–Define the data requirements

–Calculate abnormal returns – calculate the expected returns

–Conduct empirical tests

RMIT University © 2010 Economics, Finance & Marketing 7

Stock Market Impact• Abnormal returns calculated by the market model

–Market Model

–Rit = β0 + β1Rmt + εit

–ARit = Rit – (β0 + β1Rmt)

• Once that has been performed per stock, then average abnormal returns are calculated; AARt = 1/n∑ARit

– In event studies, the Null Hypothesis is that AARt = 0

– If we expect good news, then AARt > 0

– If we expect bad news, then AARt < 0

–When testing hypotheses we need to have standard errors

–Pooled Time series estimate of ARit

–Cross section estimate of ARit for each t

• Cumulative abnormal Returns

–CAR = ∑AARit

RMIT University © 2010 Economics, Finance & Marketing 8

Stock Market Impact

• To gauge the international impact of the announcement of the RSPT I downloaded FTSE data for Global mining and Australian mining.

RMIT University © 2010 Economics, Finance & Marketing 9

Stock Market Impact

RMIT University © 2010 Economics, Finance & Marketing 10

Stock Market Impact

• Daily data have volatility bunching that must be modelled using a GARCH process.

• I estimate the following model

Ri,t = αi,t + βi,tRm,t + μi,tRm,tRSPT + εi,t

ht = α0 + α1ε2t-1 + β1ht-1

• I calculate cumulative abnormal returns.

• This is a classic ‘bad news’ graphic.

• I repeat that exercise for Australian data using the ASX 200 and ASX Mining Indices.

• Again this is a classic ‘bad news’ graphic.

RMIT University © 2010 Economics, Finance & Marketing 11

Stock Market Impact

RMIT University © 2010 Economics, Finance & Marketing 12

Stock Market Impact

RMIT University © 2010 Economics, Finance & Marketing 13

Conclusion

• Despite various claims being made

– The RSPT was theoretically flawed

– The RSPT was not well received by markets

• The former PMs claim

If you look at what’s happening generally with resource stocks over the last month, they’ve basically outperformed the general exchange here in Australia, they’ve outperformed resource stocks around the world.

was not true.