Tax-Efficient Asset Management: Evidence from Equity Mutual Funds
University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)
Nanyang Technological University - Nanyang Business School
February 26, 2014
Investment taxes have a substantial impact on the performance of taxable mutual fund investors. Mutual funds can reduce the tax burdens of their shareholders by avoiding securities that are heavily taxed and by avoiding realizing capital gains that trigger higher tax burdens to the funds’ investors. Such tax avoidance strategies constrain the investment opportunities of the mutual funds and might reduce their before-tax performance. Our paper empirically investigates the costs and benefits of tax-efficient asset management based on U.S. equity mutual funds. We find that mutual funds that follow tax-efficient asset management strategies generate superior after-tax returns. Surprisingly, more tax-efficient mutual funds do not underperform other funds before taxes, indicating that the constraints imposed by tax-efficient asset management do not have significant performance consequences.
Number of Pages in PDF File: 51
Keywords: Dividend and Capital Gains Taxes, Mutual Fund Performance
JEL Classification: G18, G20, G23, H24
Date posted: December 18, 2013 ; Last revised: February 27, 2015
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