DOI: 10.5176/2251-1997_AF17.57

Authors: Younghan Lee, Steve Globerman and Steve Globerman


This research analyzes the impact of a Securities Transaction Tax (STT) on the South Korean capital market. Before 2001, stock transactions for which the market price was below a stock’s face amount were exempt from an STT in South Korea. In 2001, the South Korean government decided to levy an STT on these low pricing stocks’ transactions to prevent speculative transactions. So, we can observe both cross-sectional differences and time-series differences between STT taxed and non-taxed stock return volatility, trading volume, and tax capitalization effect before and after STT taxation regulation change. According to our empirical results, an STT reduces trading volume in the short run. Trading volumes of newly taxed STT stocks were reduced after STT taxation for a one-month window. However, this result could not be maintained in extended windows. With regards to tax capitalization effects, our research does not show a significant result. This paper's evidence also shows that STTs significantly reduce volatilities in all windows (30 days, 60 days, and 90 days). This result is distinctive because it is rare evidence that supports the theoretical expectation. Many theoretical studies insist that an STT reduces market volatility by suppressing speculative and noisy trading, but most previous empirical studies reported that an STT either increases market volatility or does not have significant influences. Most previous empirical results did not coincide with that theoretical expectation and had the limitation that only used comparison on aggregate market index return, trading volumes, and market index volatility before and after the STT tax rate change, therefore they could not identify cross- sectional difference between STT levied or exempted. But this study can utilize the unique experimental situation on STT taxation and show the different empirical evidence against the prior results. Our analysis shows the possibility that the confusing empirical results from previous studies were caused by compounding variables or experimental problem

Keywords: Securities Transaction Tax, Tax Capitalization Effect, Trading Volume, Volatility


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