There is a body of received theories which suggest that tax policy changes actually influence the value of corporations, and affect capital market values. There is strong evidence of share price being changed whenever good or bad news from tax changes occur. This paper provides a very short review of well-known theories, with the aim of showing how tax changes relating to dividends in Malaysia and in the USA do actually affect the values of shares in one mid-income and one high-income economy. Malaysia’s policy change in 2007 to streamline the dividend credit system into a single-tier tax system led to share price increases in Bursa Malaysia. Tax effect in the USA was tested using the good news of dividend tax cuts passed into law on three dates over 2003 and 2010. These findings are very much policy relevant for the ongoing debate, for example, in Malaysia on introducing future goods and sales tax to reduce other taxes.

This article evaluates how tax reforms affect stock prices of local and foreign firms in Oman and Saudi Arabia. Both countries introduced corporate tax on foreign firms, exempting local firms from corporate tax, when they moved away from a pre-existing Islamic tax neutrality policy. These reforms were implemented in 2009 in Oman and in 2004 in Saudi Arabia. These tax reform events – applying to foreign firms and not applying to local firms in the same markets – offer ideal experimental situations in two economies to test the taxation theories on how stock prices must react. We find that the results support the Modigliani- Miller and Elton-Gruber tax theories in two ways. Firstly, foreign firms that had their taxes reduced experienced stock price increases. Secondly, local firms not subjected to tax or tax reduction showed no visible tax effect. These are theory-consistent findings in the unique tax environments in these two Islamic countries, which moved away from tax neutrality, enabling us to obtain very clear evidence on modern theories of taxation. In our view, this evidence is significantly important addition to the literature on tax and taxation and for those contemplating a move away from Islamic tax neutrality.