Personal taxation and individual stock ownership

Abstract

ABSTRACT Under a differential taxation system, portfolio allocation decisions are based not only on the risk-return relationship of assets but also on their tax characteristics. The higher the tax burden on equity securities, the lower the share of stock investment in a tax-optimal portfolio. I use a multitude of changes in personal tax rates to assess the impact of personal taxes on individual stock ownership among a sample of 9,055 listed European firms. I observe lower levels of individual stock ownership, if relative personal taxes on stock ownership are higher than personal taxes on bonds. Cross-sectional evidence further reveals that the relation between personal taxation and individual stock ownership is significantly moderated by firm-specific risk. I additionally provide single country evidence of a tax clientele effect. Following an increase in the personal capital gains tax rate in Austria, I find individual owners to rebalance stock ownership to maximize after-tax returns in light of the new tax rules.