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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7669.
Length: Date of creation: Apr 2000 Date of revision: Handle: RePEc:nbr:nberwo:7669
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Find related papers by JEL classification: G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
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