Tax Evasion and Managerial Incentives: Evidence from the FATCA and Offshore Mutual Funds
67 Pages Posted: 31 Aug 2020 Last revised: 28 Jun 2021
Date Written: June 26, 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. Enhanced performance comes from more active management and better processing of information and is more substantial for tax-sensitive funds. Our results reveal a novel substitution effect between tax evasion and performance in the offshore market, which has important normative implications, showing that curbing offshore tax evasion can help improve efficiency in the global asset management industry and related markets.
Keywords: tax evasion; FATCA; mutual funds; managerial incentives; market efficiency
JEL Classification: F36, G15, G23, H26
Suggested Citation: Suggested Citation