Working Paper: NBER ID: w7669
Authors: Joel M. Dickson; John B. Shoven; Clemens Sialm
Abstract: Investors holding mutual funds in taxable accounts face a classic externality. The after-tax return of their investment depends on the behavior of others. In particular, redemptions may force the mutual fund to sell some of its equity positions in order to pay off the liquidating investors. As a result, it may be forced to distribute taxable capital gains to its shareholders. On the other hand, new investors convey a positive externality upon existing investors by diluting the unrealized capital gain position of the fund. This paper's simulations show that these externalities are important determinants of the after-tax performance of equity mutual funds.
Keywords: No keywords provided
JEL Codes: G23; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mutual fund redemptions (G23) | Increased tax liability for remaining shareholders (H22) |
| Mutual fund redemptions (G23) | Realization and distribution of capital gains (D33) |
| New investments in mutual funds (G23) | Decreased tax burden for existing shareholders (H23) |
| New investments in mutual funds (G23) | Dilution of unrealized capital gains (G19) |