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Tax Evasion and Market Efficiency: Evidence from the FATCA and Offshore Mutual Funds

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  • Massa, Massimo
  • Cheng, Si
  • Zhang, Hong

Abstract

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

Suggested Citation

  • Massa, Massimo & Cheng, Si & Zhang, Hong, 2021. "Tax Evasion and Market Efficiency: Evidence from the FATCA and Offshore Mutual Funds," CEPR Discussion Papers 15747, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15747
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    More about this item

    Keywords

    Tax evasion; Fatca; Mutual funds; Skills; Market efficiency;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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