Over the past 70 years, direct equity ownership by households has declined strongly. In the United States, for example, households directly owned 90% of the stock market in 1945. By 2010, this figure had decreased to less than 30%. A similar trend is observable in other countries.

The authors argue that government policies regarding taxes and retirement income can explain this trend because such policies provide incentives for households to give up direct ownership of stocks. They develop empirical measures to test the relationship between these policies and the decline in direct ownership and find evidence to support their hypothesis that tax benefits drive investors into indirect stock ownership. The empirical evidence is based on long-term time series for eight industrial countries over 60 years.

The transfer of stock ownership from individuals to intermediaries appears to be significantly related to variations in tax policy. The authors’ findings have implications for several research topics in financial economics. First, the dynamic shift from households to pension plans, which is partly fueled by tax incentives, may be a factor that contributes to increases in asset prices. Second, the changing structure of stock ownership assigns an increasingly important role to financial intermediaries with respect to corporate governance. Third, the changes in ownership structure imply that governments have suffered considerable losses in tax revenue. This result, in turn, should lead to discussions about the magnitude and appropriateness of this tax subsidy in the context of the overall fiscal situation. Fourth, government policies may be responsible for at least some of the growth of delegated portfolio management over the past decades.

To empirically identify the importance of government incentives for household and institutional assets, a fairly large dataset needs to be assembled. The dataset must be both sufficiently broad in the coverage of different countries and comprehensive enough to adequately capture asset holdings by sector, relevant tax legislation, and retirement provisions. The authors collect time series spanning 60 years for eight countries: the United States, Canada, Finland, France, Germany, Japan, Sweden, and the United Kingdom. They assemble information about equity ownership by sector and effective tax rates on personal income, dividends, and capital gains, as well as relevant retirement provisions for each country.

On the basis of these data, the authors construct the three variables used in the regression analysis. The dependent variable is the change in the fraction of household ownership. The two independent variables are the yield gap (i.e., the difference between the rate of return from holding assets inside and that from holding assets outside the retirement plan) and a proxy for income smoothing, which measures the benefits of shifting income from high-income work years to low-income retirement years.

In the regression analysis, the yield gap is statistically significant but the proxy for income smoothing is not. In the main specification, a 3% difference between the rate of return inside and outside a savings plan implies an annual reduction in the fraction of household ownership of 1%. A number of variations in parameter assumptions and econometric methodology confirm the robustness of the main results.

The authors provide an explanation for the growth of delegated asset management that differs from the standard approaches, which focus on the need for diversification and lower transaction costs. As the authors point out, they are unable to assess the relative importance of the different explanations because of their focus on the tax view. Future research, therefore, needs to incorporate joint tests of these competing hypotheses. The carefully assembled dataset certainly provides a rich source for additional research along these lines.