Actively managed ETFs vs actively managed mutual funds

Purpose The purpose of this paper is to study if actively managed exchange-traded funds (AMETFs) and actively managed mutual funds (AMMFs) are complements or substitutes. It also tests if there are tax or liquidity clientele effects. Design/methodology/approach The study investigates the relation between individual AMMF flows and aggregate AMETF flows as well as individual AMETF flows and aggregate AMMF flows. A 2013 tax change is used to analyze if a tax clientele effect exists between the AMETF and AMMF markets. The authors use differences in investor groups for institutional vs retail fund share classes to test for liquidity clientele effects. Findings The authors find that equity and mixed AMETFs and AMMFs are substitutes, although not perfect substitutes. Taxation-related differences between the two products create a clientele effect for fixed income and mixed funds where tax-sensitive investors are more likely to substitute AMETFs for AMMFs surrounding tax increases. There is weak evidence that institutional investors may prefer AMETFs more than retail investors because of their enhanced liquidity. Originality/value This is the first study to investigate the flow relation between AMETFs and AMMFs. The fast-paced growth of the AMETF area coupled with the substitutability between the two products and tax advantages of AMETFs has the capability to gain significant market share from AMMFs in the future.

The Dividend Initiation Decision of Newly Public Firms: Some Evidence on Signaling with Dividends

We track the dividend initiation (DI) decisions from a sample of 6,588 firms that went public during the period 1979–2005 and find that 873 of them initiated dividends. Our primary objective is to determine whether information signaling can explain the DI decision. We find that variables suggested by the dividend-signaling models of John and Williams (1985) and Allen, Bernardo, and Welch (2000) are significant determinants of the DI decision and the associated announcement-period stock price effect. We also find support for the residual, agency, tax, clientele, transaction costs, catering, and life-cycle explanations of dividend policy.

Alternative Minimum Tax And Effective Returns From Municipal Bonds

Taxpayers must pay the alternative minimum tax (AMT) if a minimum tax rate applied to a broad measure of income results in an amount greater than the regular tax. The AMT rate is 20 percent for corporations and 24 percent for other taxpayers. Currently, this broad measure of income includes 100 percent of private activity bond interest and, for corporations, encompasses up to 75 percent of other tax-exempt interest. This paper explains the computation of the AMT and shows the effect of the AMT on after-tax yields from investment in municipal securities. In particular, it demonstrates that the after-tax return on municipal bonds declines with an increase in the number of years until the AMT credit resulting from previous years AMT paid is utilized. The paper then analyzes the AMT in terms of the tax clientele it creates and the implicit tax it may reduce.

Evidence of Tax-Clientele-Related Trading following Dividend Increases

The tax-clientele theory suggests that higher (lower) tax-rate investors should, ceteris paribus, concentrate their portfolios in tax-favored (explicitly taxed) assets. While evidence supporting the tax-clientele theory exists, research on tax-induced dividend clienteles for common stocks is mixed. This study examines trading activity, measured using daily transaction data, following dividend increases for evidence of shareholder clientele changes. Consistent with implications of the tax-induced dividend clientele theory, I document a strong positive association between dividend increase magnitude and post-dividend-increase trading activity. This result provides evidence that tax clienteles for dividend policies exists and that their effect is strong enough to influence investors' decisions. Further, consistent with dividend clienteles existing, I find that the relation between dividend-increase magnitude and postdividend-increase trading activity decreases with higher pre-dividend-increase dividend levels.