Tax-Sensitive Institutional Investors

Abstract

We provide a new measure of tax-sensitive institutional ownership. Using discriminant analysis and the characteristics of a sample of institutional investors that are unambiguously tax-sensitive or unambiguously tax-insensitive, we classify all institutions that file Form 13F with the SEC over the period 1987-2009 as either tax-sensitive or tax-insensitive. We classify 49.5 percent of the total number of 13F institutional investors as tax-sensitive. Because tax-sensitive institutions tend to manage much smaller portfolios, they only account for 12.7 percent of the total equity managed by all 13F institutions. We confirm the validity of our measure with price pressure and portfolio-level analyses around the 1997 announcement of the cut in the maximum, statutory individual-level capital gains tax rate and with portfolio-level analysis around the 2003 cut in the maximum, statutory, individual-level dividend tax rate. Researchers could use our measure to study the relation between shareholder-level taxes and asset prices and factors that influence the investment decisions of tax-sensitive investors.