The effect of taxes on shareholder inflows around mutual fund distribution dates

Taxable investors who are considering purchasing mutual fund shares around the dates when a mutual fund is planning a taxable distribution can reduce the present discounted value of their tax liability by delaying their purchase until after the distribution date. Non-taxable shareholders, such as those who invest through IRAs and other tax-deferred accounts, face no such incentive for delaying a purchase of the fund. This paper compares daily shareholder transactions by taxable and non-taxable investors in the mutual funds of a single no-load fund complex around distribution dates. Gross inflows to taxable accounts are significantly lower in the weeks preceding distribution dates than in the weeks following them, but gross inflows to tax-deferred accounts do not change around these dates. This finding suggests that some taxable shareholders time their purchase of mutual fund shares to avoid the tax acceleration associated with distributions. Taxable shareholders who purchase shares just before distribution dates also have shorter holding periods, on average, than those who buy just after a distribution. Since the cost of the distribution-related tax acceleration for pre-distribution buyers is related to the expected holding period of the shares, this finding provides some evidence of clientele formation among the buyers of mutual fund shares.