The Mutual Fund—An Institutional Investor that Acts Like an Individual
ABSTRACT: We examine changes in the average mutual fund’s investments following the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRR). The JGTRR decreased the tax penalty on dividend and capital gains income. We hypothesize that mutual fund managers will respond to the investment preferences of the underlying shareholders and increase their ownership of dividend-paying firms. We present evidence supporting the hypothesis that mutual fund managers increased their ownership of dividend-paying firms following the JGTRR. However, we do not find evidence that the investment managers of other institutional investors increased their ownership of dividend-paying firms following the JGTRR. These results indicate that mutual funds are influenced by the tax preferences of their underlying investors, form tax clienteles, and exhibit different investment policies when compared to other types of institutional investors.