Do After-Tax Returns Affect Mutual Fund Inflows?

49 Pages Posted: 5 May 2000 Last revised: 28 Apr 2023

See all articles by Daniel Bergstresser

Daniel Bergstresser

Brandeis International Business School

James M. Poterba

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2000

Abstract

This paper explores the relationship between the after-tax returns that taxable investors earn on equity mutual funds and the subsequent cash inflows to these funds. Previous studies have documented that funds with high pretax returns attract greater inflows. This paper investigates the relative predictive power of pre-tax and after-tax returns for explaining annual fund inflows. The empirical results, based on a large sample of equity mutual funds over the period 1993-1998, suggest that after-tax returns have more explanatory power than pretax returns in explaining inflows. In addition, funds with large overhangs' of unrealized capital gains experience smaller inflows, all else equal, than funds without such unrealized gains. By disaggregating net fund inflows into gross inflows and gross redemptions, the paper also provides some insight on how after-tax returns and prospective capital gain realizations affect investor behavior.

Suggested Citation

Bergstresser, Daniel and Poterba, James M. and Poterba, James M., Do After-Tax Returns Affect Mutual Fund Inflows? (March 2000). NBER Working Paper No. w7595, Available at SSRN: https://ssrn.com/abstract=222234

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James M. Poterba

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