This article examines the possible linkage between tax effects (both realized gains/losses and unrealized gains/losses) and flow of funds for actively managed corporate bond funds over the period 1997 to 2006. Using a sample of 741 corporate bond funds that exist at some time during that ten year period, the findings of this essay indicate that new investors to bond funds are sensitive to unrealized capital gains/losses, however, the flow of funds is not affected by past dividend distributions. Findings further indicate that tax liabilities, unrealized gains/losses, and managerial tenure explain post-tax abnormal performance after controlling for investment style, market, and other known factors that explain the pre-tax performance of bond funds. The results of this article highlight the discrepancy between managed equity and bond funds in terms of performance and flow of funds after considering tax-related implications; findings indicate that results found in existing studies on tax and tax overhang effects on equity funds may not be fully applicable to actively managed bond funds.
