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Tax Externalities of Equity Mutual Funds

John B. Shoven, Joel Dickson and Clemens Sialm ()

No 7669, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G23 H23 (search for similar items in EconPapers)
Date: 2000-04
New Economics Papers: this item is included in nep-fin, nep-pbe and nep-pub
Note: AG PE
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Published as Dickson, Joel, John Shoven, and Clemens Sialm. “Tax Externalities of Equity Mutual Funds.” National Tax Journal 53 (3/2) (2000): 607-628.

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