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Do after-tax returns affect mutual fund inflows?

  • Bergstresser, Daniel
  • Poterba, James

This paper explores the relationship between the after-tax returns that taxable investors earn on equity mutual funds and the subsequent cash inflows to these funds. Previous studies have documented that funds with high pretax returns attract greater inflows. This paper investigates the relative predictive power of pre-tax and after-tax returns for explaining annual fund inflows. The empirical results, based on a large sample of equity mutual funds over the period 1993-1998, suggest that after-tax returns have more explanatory power than pretax returns in explaining inflows. In addition, funds with large overhangs' of unrealized capital gains experience smaller inflows, all else equal, than funds without such unrealized gains. By disaggregating net fund inflows into gross inflows and gross redemptions, the paper also provides some insight on how after-tax returns and prospective capital gain realizations affect investor behavior.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 63 (2002)
Issue (Month): 3 (March)
Pages: 381-414

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Handle: RePEc:eee:jfinec:v:63:y:2002:i:3:p:381-414
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  1. Poterba, James M., 2002. "Taxation, risk-taking, and household portfolio behavior," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 17, pages 1109-1171 Elsevier.
  2. Jennifer Carpenter & Anthony Lynch, 1998. "Survivorship Bias and Attrition Effects in Measures of Performance Persistence," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-077, New York University, Leonard N. Stern School of Business-.
  3. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1996. "Survivorship Bias and Mutual Fund Performance," Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1097-1120.
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  9. Joseph E. Stiglitz, 1983. "Some Aspects of the Taxation of Capital Gains," NBER Working Papers 1094, National Bureau of Economic Research, Inc.
  10. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
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  12. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  13. Gibson, Scott & Safieddine, Assem & Titman, Sheridan, 2000. "Tax-Motivated Trading and Price Pressure: An Analysis of Mutual Fund Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 369-386, September.
  14. Khorana, Ajay & Servaes, Henri, 1999. "The Determinants of Mutual Fund Starts," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1043-74.
  15. Barclay, Michael J. & Pearson, Neil D. & Weisbach, Michael S., 1998. "Open-end mutual funds and capital-gains taxes," Journal of Financial Economics, Elsevier, vol. 49(1), pages 3-43, July.
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