Corporate Tax Avoidance and Mutual Fund Ownership

Abstract

We document evidence that mutual funds, on average, are averse to investing in tax-avoiding firms, which seems anomalous given the potential for two likely motives. Mutual fund managers’ compensation incentives may lead them to prefer tax-avoiding firms, or the fact that mutual funds are well-diversified may lead to managers’ indifference. A less obvious motive, and one consistent with our results, is that mutual funds focus on decreasing their tax information processing costs. Our results remain similar when we address endogeneity concerns using several methods, including difference-in-differences and matching methodologies, and after running numerous robustness checks.

Keywords: Tax Avoidance, Mutual Fund, Tax Risk, Institutional Investor

JEL Classification: G11, G23, G30, H25, H26