Abstract
In this paper we investigate whether mutual fund managers engage in tax planning by testing whether they time securities sales in their funds in response to changes in capital gains tax rates. Although previous evidence suggests that individuals investors engage in this shifting behavior (Auerbach [1988]), open-end mutual funds cannot necessarily be expected to tax plan like individuals because fund managers have incentives to consider the tax liability of both current investors and potential investors. Our question is, conditional on balancing the interests of the interests of these two groups of investors, do mutual funds time their capital gains realizations to decrease taxes.
As a comparison to open-end funds, we include a sample of closed-end funds. Managers of open-end funds have strong incentives to worry about potential investors, while managers of closed-end funds do not. Our results suggest that closed-end stock funds -- similar to individuals -- shift capital gains realizations from periods of high capital gains tax rates to periods of lower rates. Open-end stock funds do not exhibit this pattern. Further evidence suggests that open-end funds shift differently than closed-end funds because open-end funds are minimizing the tax liability of potential investors over current investors.