“The particular tax policies that have influenced stock ownership are those that on the one hand have increased households’ income tax, and on the other have created the possibility for pre-tax savings,” said Ilya Strebulaev, associate professor of finance and Spence Faculty Scholar for 2010-2011, a coauthor of the study.  

Such policies, he notes, are fairly recent, having originated only in the 1930s in the United States. The study found that just after World War II, individual citizens owned 90% of the stock market; by 2006, they owned only 30%.   

Using empirical data, Strebulaev and his coauthors, Kristian Rydqvist and Joshua Spizman of Binghamton University in New York, made the discovery that up to 70% of all stocks in the United States — held by domestic agents such as mutual funds, pension funds, and insurance companies — are now kept in tax-deferred plans.  

The researchers also looked internationally, collecting information from countries such as France, the U.K., Japan, Sweden, Germany, Canada, and Finland, and found the same patterns over time quite clearly. "We see the evolution of stock ownership from individuals to intermediaries in many countries, and this trend does match their variations in tax policies," said Strebulaev.  

The paper also explains the creation of the mutual fund industry. The researchers discovered that as late as 1980, the mutual fund industry in the United States owned less than 4% of all stocks in the nation, today they are major owners of stocks. Most observers assume the industry grew to address people's need to diversify their portfolios, the press release said. "We show, however, that in various countries, mutual funds took off only when the 'defined-benefit' retirement plans were replaced with 'defined-contribution' plans — which allow people to choose their own providers," Strebulaev noted.   

"The same phenomenon happened in other countries as soon as retirement contribution plans were instituted. In countries where retirement contribution funds did not get instated, mutual funds never took off,” according to Strebulaev.  

The study's findings are not confined to stocks; the same changes happened in bond markets.