Tax-Exempt Investors and the Asset Allocation Puzzle

18 Pages Posted: 19 Feb 2001

See all articles by Jack Mintz

Jack Mintz

University of Calgary - The School of Public Policy; CESifo (Center for Economic Studies and Ifo Institute)

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2000

Abstract

Investors frequently hold equity in tax-exempt savings vehicles such as pension plans, despite the prediction of the standard model that they hold only bonds. We provide a new explanation for this empirical puzzle based on differences between pensions and taxable assets in the tax treatment of capital losses. We show how limits on refundability of losses on taxable equities leads to diversity of investors? preferences for corporate leverage on the basis of tax rates. In the simplest equilibrium of the model, tax-exempt savers hold risky, highly leveraged equities, while low-bracket taxable savers hold bonds and high-bracket taxpayers hold relatively safe, unleveraged equities. We discuss the implications of tax-exempts for risk taking and agency costs within the firm.

JEL Classification: H25

Suggested Citation

Mintz, Jack and Smart, Michael, Tax-Exempt Investors and the Asset Allocation Puzzle (January 2000). Available at SSRN: https://ssrn.com/abstract=260010

Jack Mintz (Contact Author)

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada
403-220-7661 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Michael Smart

University of Toronto - Department of Economics ( email )

150 St. George Street
Institute for Policy Analysis
Toronto, Ontario M5S 3G7
Canada
416-978-5119 (Phone)
416-978-6713 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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