DP15747 Tax Evasion and Market Efficiency: Evidence from the FATCA and Offshore Mutual Funds

Author(s): Si Cheng, Massimo Massa, Hong Zhang
Publication Date: February 2021
Keyword(s): FATCA, Market Efficiency, Mutual funds, skills, tax evasion
JEL(s): F36, G15, G23, H26
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15747

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