Tax Externalities of Equity Mutual Funds

47 Pages Posted: 18 May 2000 Last revised: 12 Mar 2010

See all articles by John B. Shoven

John B. Shoven

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Joel M. Dickson

Stanford University

Date Written: April 2000

Abstract

Investors holding mutual funds in taxable accounts face a classic externality. The after-tax return of their investment depends on the behavior of others. In particular, redemptions may force the mutual fund to sell some of its equity positions in order to pay off the liquidating investors. As a result, it may be forced to distribute taxable capital gains to its shareholders. On the other hand, new investors convey a positive externality upon existing investors by diluting the unrealized capital gain position of the fund. This paper's simulations show that these externalities are important determinants of the after-tax performance of equity mutual funds.

Suggested Citation

Shoven, John B. and Sialm, Clemens and Dickson, Joel M., Tax Externalities of Equity Mutual Funds (April 2000). NBER Working Paper No. w7669. Available at SSRN: https://ssrn.com/abstract=228143

John B. Shoven (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
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National Bureau of Economic Research (NBER)

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Clemens Sialm

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Joel M. Dickson

Stanford University

Stanford, CA 94305
United States

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