Personal taxation and individual stock ownership

Silke Rünger

The European Journal of Finance, 2021, vol. 27, issue 6, 596-611

Abstract: Under a differential taxation system, portfolio allocation decisions are based not only on the risk-return relationship of assets but also on their tax characteristics. The higher the tax burden on equity securities, the lower the share of stock investment in a tax-optimal portfolio. I use a multitude of changes in personal tax rates to assess the impact of personal taxes on individual stock ownership among a sample of 9,055 listed European firms. I observe lower levels of individual stock ownership, if relative personal taxes on stock ownership are higher than personal taxes on bonds. Cross-sectional evidence further reveals that the relation between personal taxation and individual stock ownership is significantly moderated by firm-specific risk. I additionally provide single country evidence of a tax clientele effect. Following an increase in the personal capital gains tax rate in Austria, I find individual owners to rebalance stock ownership to maximize after-tax returns in light of the new tax rules.

Date: 2021
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DOI: 10.1080/1351847X.2020.1837899

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