This study examines whether the management style of a fund differs depending on the type of fund being managed for tax purposes, given the rules of temporary tax relief for fund investments. The study considers a change in the ratio of tax-favored assets to the net asset value of a tax relief qualified fund around the effective date of tax relief laws in South Korea in 2007 and 2016. A regression model is used to test sample data from domestic and overseas equity funds available in the three months before and after the 2007 and 2016 Restriction of Special Taxation Act came into effect. It was found that the ratio of the value of tax-favored assets to the net asset value in the tax relief qualified fund increased significantly since the enactment of tax relief laws in both 2007 and 2016. These findings suggest that fund managers may try to change the asset allocation in a managed fund to increase the after-tax return of the fund investor, which means that fund managers do take into account the potential tax burden on fund investors and try to minimize it. AcknowledgmentThis work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF- 2019S1A5A8035027).

Tax credits for investment in productivity enhancement facilities, R&D facilities, and employment-creating initiatives are available to corporate taxpayers in Korea. These incentives are intended to motivate corporations to invest by providing financial support to improve their efficiency and help sustain their survival. This study aims to analyze whether corporations that claim investment tax credits (ITCs) in Korea actually achieve investment efficiency and increase corporate value. This study’s results are as follows. First, based on the statistical analysis of samples from small- and medium-sized enterprises (SMEs) and all corporations, we find empirical evidence that investments through claimed tax credits are inefficient from the standpoint of Tobin’s Q. This finding may be interpreted to mean that corporate taxpayers, including SMEs, consider tax savings more than investment efficiency in claiming ITCs. Second, in testing the investment efficiency for each ITC, we find that SMEs’ investment via employment-creating ITCs is more efficient than other investments with tax credits. This finding implies that SMEs should not only invest in physical facilities, but also retain human resources for sustainability. These results provide policy implications that employment creation should be considered when granting ITCs for SMEs’ efficient investments.