Tax Evasion and Market Efficiency: Evidence from the FATCA and Offshore Mutual Funds
42 Pages Posted: 31 Aug 2020
Date Written: August 24, 2020
Using the Foreign Account Tax Compliance Act (FATCA) as an exogenous shock that reduces the tax advantages of offshore funds sold to U.S. investors, we document that affected funds significantly enhance their performance as a response. This effect is stronger for funds domiciled in tax havens and for skilled funds with low flow volatility. Moreover, in generating additional performance, FATCA-affected funds also increase the price efficiency of their invested stocks. Our analysis has important normative implications in showing that curbing offshore tax evasion could help improve efficiency in both the global asset management industry and the security market.
Keywords: tax evasion, FATCA, mutual funds, skills, market efficiency
JEL Classification: F36, G15, G23, H26
Suggested Citation: Suggested Citation