Tax Evasion and Information Production: Evidence from the FATCA

Abstract

We examine how tax evasion affects offshore information production. Using the Foreign Account Tax Compliance Act (FATCA) as an exogenous shock, we document that affected offshore asset management companies significantly enhance their performance as a response. This improvement comes from better information processing and is more substantial for tax-sensitive companies. Other policies related to fees and portfolio-based tax management are less affected. Our results reveal a novel substitution effect between tax evasion and information production, suggesting that curbing offshore tax evasion can help improve competitiveness and efficiency in the global asset management industry and related markets.

Keywords: tax evasion; FATCA; asset management; market efficiency

JEL Classification: F36, G15, G23, H26