Tax-exempt investors and the asset allocation puzzle
AbstractInvestors frequently hold equity in tax-exempt savings vehicles such as pension plans, despite the prediction of the standard model that they hold only bonds. We provide a new explanation for this empirical puzzle based on differences between pensions and taxable assets in the tax treatment of capital losses. We show how limits on refundability of losses on taxable equities leads to diversity of investors' preferences for corporate leverage on the basis of tax rates. In the simplest equilibrium of the model, tax-exempt savers hold risky, highly leveraged equities, while low-bracket taxable savers hold bonds and high-bracket taxpayers hold relatively safe, unleveraged equities. We discuss the implications of tax-exempts for risk taking and agency costs within the firm.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Public Economics.
Volume (Year): 83 (2002)
Issue (Month): 2 (February)
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Web page: http://www.elsevier.com/locate/inca/505578
Other versions of this item:
- Jack Mintz & Michael Smart, 2000. "Tax-Exempt Investors and the Asset Allocation Puzzle," CESifo Working Paper Series 242, CESifo Group Munich.
- Jack Mintz & Michael Smart, 1998. "Tax-exempt investors and the asset allocation puzzle," Working Papers msmart-98-04, University of Toronto, Department of Economics.
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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