The effects of after-tax return disclosure on investor decision making

As Mutual Funds have grown in popularity over the past decade, investors have become more aware of the tax implications of their investments. Mutual funds are required by law to distribute their earnings yearly and these distributions result in taxable income to investors. The distributions are taxed either as ordinary income and/or capital gains based on the trading strategy of the fund manager, not the holding period of the investor. This creates significant taxable income, which can significantly reduce the net return earned by mutual fund investors.; The first issue addressed by this study is whether tax-advantaged mutual funds provide equivalent or higher net after-tax returns to the investors. If it is found that they do, after-tax return information becomes increasingly important to current and potential investors. New SEC (Securities and Exchange Commission) regulations require mutual funds to disclose after-tax returns to investors. Prior to the enactment of new SEC regulations, investors were only provided information concerning pre-tax returns along with other tax-related information (i.e. ratio of capital gains/ordinary income, churning/turnover rates of a portfolio), whose effects on the net returns were not provided. This study also looks to examine investor's behavior relating to information available prior to and post the new SEC regulations. Specifically, do investors utilize after-tax returns to a greater extent than the information (pre-tax returns, turnover information, and distribution information) that was available prior to the enactment of the new regulations?; The findings of this study indicate that tax-advantaged mutual funds earn returns equivalent to or greater than the mutual fund population. In addition, this study provides evidence that after-tax return information is utilized by investors to a greater extent than information that was available prior to the new SEC regulations. The results in this study indicate that transparency of mutual fund disclosures are important and beneficial to current and potential investors.