1. The Stock Market Reaction to the Resource Super Profit Tax Sinclair Davidson

2. RMIT University © 2010 Economics, Finance & Marketing2 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.

3. RMIT University © 2010 Economics, Finance & Marketing3 Impact of the RSPT

4. RMIT University © 2010 Economics, Finance & Marketing4 Impact of the RSPT Source: AFR 1 June 2010

5. RMIT University © 2010 Economics, Finance & Marketing5 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

6. RMIT University © 2010 Economics, Finance & Marketing6 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

7. RMIT University © 2010 Economics, Finance & Marketing7 Stock Market Impact Abnormal returns calculated by the market model –Market Model –R it = β 0 + β 1 R mt + ε it –AR it = R it – (β 0 + β 1 R mt ) Once that has been performed per stock, then average abnormal returns are calculated; AAR t = 1/n∑AR it –In event studies, the Null Hypothesis is that AAR t = 0 –If we expect good news, then AAR t > 0 –If we expect bad news, then AAR t < 0 –When testing hypotheses we need to have standard errors –Pooled Time series estimate of AR it –Cross section estimate of AR it for each t Cumulative abnormal Returns –CAR = ∑AAR it

8. RMIT University © 2010 Economics, Finance & Marketing8 Stock Market Impact To gauge the international impact of the announcement of the RSPT I downloaded FTSE data for Global mining and Australian mining.

9. RMIT University © 2010 Economics, Finance & Marketing9 Stock Market Impact

10. RMIT University © 2010 Economics, Finance & Marketing10 Stock Market Impact Daily data have volatility bunching that must be modelled using a GARCH process. I estimate the following model R i,t = α i,t + β i,t R m,t + μ i,t R m,t RSPT + ε i,t h t = α 0 + α 1 ε 2 t-1 + β 1 h t-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.

11. RMIT University © 2010 Economics, Finance & Marketing11 Stock Market Impact

12. RMIT University © 2010 Economics, Finance & Marketing12 Stock Market Impact

13. RMIT University © 2010 Economics, Finance & Marketing13 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.