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

See all articles by Lutz Horn

Lutz Horn

Goethe University Frankfurt

Steffen Meyer

University of Southern Denmark - Department of Business and Economics; Danish Finance Institute

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE

Date Written: February 15, 2009

Abstract

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

Horn, Lutz and Meyer, Steffen and Hackethal, Andreas, Smart Investing and the Role of Financial Advice - Evidence from a Natural Experiment Using Data Around a Tax Law Change (February 15, 2009). Available at SSRN: https://ssrn.com/abstract=1343623 or http://dx.doi.org/10.2139/ssrn.1343623

Lutz Horn (Contact Author)

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany
+4917620011545 (Phone)

Steffen Meyer

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Danish Finance Institute ( email )

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno Platz 3
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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