An Empirical Examination of Tax Factors and Mutual Funds' Stock Sales Decisions

We examine whether taxes affect stock sales by mutual funds. For certain funds, the expected amount of a given stock sold in a given quarter is 62% greater when liquidation would trigger a capital loss equal to 1% of the value of the portfolio than when a like-size gain would be triggered, a greater effect than is associated with either contemporaneous excess stock returns of 50% or unexpected EPS equal to 50% of the stock price. For growth funds, responses to tax factors are consistent from year to year, and dispositions vary with the year-to-date realized gain.