Since World War II, the fraction of stocks owned directly by households has decreased by 40 to 60 percentage points in the United States, the United Kingdom, and Japan. We argue that tax policy is the driving force. Using data from five countries, we show that tax-favored institutions have replaced households as stockholders and that the fraction of household ownership decreases with measures of the effective marginal tax rate. Taxation may also explain why widely-held direct ownership has been replaced by widely-held indirect ownership in the United States and the United Kingdom but by closely-held indirect ownership in Japan and Sweden. These findings are important for policy considerations on effective taxation and for financial economics research on the long-term effects of taxation on corporate finance and asset prices.
