Smart Investing and the Role of Financial Advice - Evidence from a Natural Experiment Using Data Around a Tax Law Change
28 Pages Posted: 19 Feb 2009 Last revised: 12 Feb 2016
Date Written: February 15, 2009
Unanimously theory and empirical research acknowledge that taxation is an important determinant of household portfolio choice. The introduction of a withholding tax in Germany in 2007 yields the opportunity to shed light on three important issues in a natural experiment setting. Using transaction data from a German bank this paper proves that in line with conventional wisdom private investors react to tax law changes and shift their money away from tax disadvantaged investments. Some investors however still make investment mistakes by purchasing tax disadvantaged assets. Financial sophistication and experience are shown to facilitate tax optimal investment decisions. Furthermore, the natural experiment setting allows testing the effect of financial advice in a controlled environment. We show that it contributes to ironing out investment mistakes.
Keywords: Taxation, Natural Experiment, Household Portfolio, Rationality, Financial Advice
JEL Classification: G11, D14, G14, H24, H31, G29
Suggested Citation: Suggested Citation