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Do active fund managers care about capital gains tax efficiency?

  • Fong, Kingsley Y.L.
  • Gallagher, David R.
  • Lau, Sarah S.W.
  • Swan, Peter L.

This study investigates the tax efficiency of actively managed equity funds by conducting a previously unaddressed natural experiment. Specifically, we examine whether asset sales were timed to take advantage of the introduction of a substantial discount to realized capital gains when the holding period was at least 1Â year. Institutional equity fund management in Australia is principally focused on the pre-fee and pre-tax performance surveys of leading asset consultants. Given this industry setting, our study is important because tax efficiency is not accounted for directly in the reported performance numbers, and is thus opaque. We find that active fund managers overall have significantly increased the proportion of long-term capital gains realized after the change in taxation code, although there are significant variations across funds. We also find that active fund managers realize more long-term gains on both large capitalization and low volatility stocks.

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Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

Volume (Year): 17 (2009)
Issue (Month): 2 (April)
Pages: 257-270

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Handle: RePEc:eee:pacfin:v:17:y:2009:i:2:p:257-270
Contact details of provider: Web page: http://www.elsevier.com/locate/pacfin

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  1. John B. Shoven & Joel Dickson & Clemens Sialm, 2000. "Tax Externalities of Equity Mutual Funds," NBER Working Papers 7669, National Bureau of Economic Research, Inc.
  2. James M. Poterba & Scott J. Weisbenner, 1998. "Capital Gains Tax Rules, Tax Loss Trading and Turn-of-the-Year Returns," NBER Working Papers 6616, National Bureau of Economic Research, Inc.
  3. Mark Grinblatt & Matti Keloharju, 2000. "Tax-Loss Trading and Wash Sales," Yale School of Management Working Papers ysm148, Yale School of Management, revised 01 Nov 2002.
  4. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
  5. Bergstresser, Daniel & Poterba, James, 2002. "Do after-tax returns affect mutual fund inflows?," Journal of Financial Economics, Elsevier, vol. 63(3), pages 381-414, March.
  6. Joel M. Dickson & John B. Shoven, 1993. "Ranking Mutual Funds on an After-Tax Basis," NBER Working Papers 4393, National Bureau of Economic Research, Inc.
  7. Stiglitz, Joseph E., 1983. "Some aspects of the taxation of capital gains," Journal of Public Economics, Elsevier, vol. 21(2), pages 257-294, July.
  8. Donald B. Keim & Ananth Madhavan, . "The Cost of Institutional Equity Trades," Rodney L. White Center for Financial Research Working Papers 08-98, Wharton School Rodney L. White Center for Financial Research.
  9. Nanda, Vikram & Narayanan, M. P. & Warther, Vincent A., 2000. "Liquidity, investment ability, and mutual fund structure," Journal of Financial Economics, Elsevier, vol. 57(3), pages 417-443, September.
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  11. Constantinides, George M., 1984. "Optimal stock trading with personal taxes : Implications for prices and the abnormal January returns," Journal of Financial Economics, Elsevier, vol. 13(1), pages 65-89, March.
  12. Li Jin, 2006. "Capital Gains Tax Overhang and Price Pressure," Journal of Finance, American Finance Association, vol. 61(3), pages 1399-1431, 06.
  13. Andrea Frazzini, 2006. "The Disposition Effect and Underreaction to News," Journal of Finance, American Finance Association, vol. 61(4), pages 2017-2046, 08.
  14. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, vol. 51(3), pages 611-36, May.
  15. 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.
  16. David R. Gallagher & Adrian Looi, 2006. "Trading behaviour and the performance of daily institutional trades," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(1), pages 125-147.
  17. Gordon J. Alexander & Gjergji Cici & Scott Gibson, 2007. "Does Motivation Matter When Assessing Trade Performance? An Analysis of Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 125-150, January.
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