Tax Evasion and Market Efficiency: Evidence from the FATCA and Offshore Mutual Funds
50 Pages Posted: 31 Aug 2020 Last revised: 23 Feb 2021
Date Written: February 17, 2021
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, income funds, and skilled funds. Moreover, in generating additional performance, affected funds increase the price efficiency of their invested stocks. Our analysis has important normative implications, showing that curbing offshore tax evasion can help improve efficiency in both the global asset management industry and the securities market.
Keywords: tax evasion, FATCA, mutual funds, skills, market efficiency
JEL Classification: F36, G15, G23, H26
Suggested Citation: Suggested Citation