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Taxes and Mutual Fund Inflows Around Distribution Dates

  • Woodrow T. Johnson
  • James M. Poterba

Capital gain distributions by mutual funds generate tax liability for taxable shareholders, thereby reducing their after-tax returns. Taxable investors who are considering purchasing fund shares around distribution dates have an incentive to delay their purchase until after the distribution, since this will reduce the present value of their tax liability. Non-taxable shareholders, such as those who invest through IRAs and other tax-deferred accounts, face no such incentive for delaying purchase. This paper compares daily shareholder transactions by taxable and non-taxable investors in the mutual funds of a single no-load fund complex around distribution dates. Gross inflows to taxable accounts are significantly lower in the weeks preceding distribution dates than in the weeks following them, but gross inflows to tax-deferred accounts do not change around these dates. This finding suggests that some taxable shareholders time their purchase of mutual fund shares to avoid the tax acceleration associated with distributions. Taxable shareholders who purchase shares just before distribution dates also have shorter holding periods, on average, than those who buy after a distribution. The cost of the distribution-related tax acceleration for pre-distribution buyers is therefore somewhat less than that for those who buy after the distribution.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13884.

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Date of creation: Mar 2008
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Handle: RePEc:nbr:nberwo:13884
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  1. 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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  8. Daniel Bergstresser & James Poterba, 2000. "Do After-Tax Returns Affect Mutual Fund Inflows?," NBER Working Papers 7595, National Bureau of Economic Research, Inc.
  9. Christoffersen, Susan E.K. & Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2005. "Crossborder dividend taxation and the preferences of taxable and nontaxable investors: Evidence from Canada," Journal of Financial Economics, Elsevier, vol. 78(1), pages 121-144, October.
  10. George M. Constantinides, 1983. "Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns," NBER Working Papers 1176, National Bureau of Economic Research, Inc.
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