Do after-tax returns affect mutual fund inflows?

This paper explores the relationship between the after-tax returns that taxable investors earn on equity mutual funds and the subsequent cash inflows to these funds. Previous studies have documented that funds with high pretax returns attract greater inflows. This paper presents evidence, based on a large sample of retail equity mutual funds over the period 1993-1999, that after-tax returns have more explanatory power than pretax returns in explaining inflows. In addition, funds with large overhangs of unrealized capital gains experience smaller inflows, all else equal, than funds without such unrealized gains. A large capital gain overhang discourages both gross fund inflows and gross outflows, but the inflow effect dominates the outflow effect. (C) 2002 Elsevier Science B.V. All rights reserved.