Working Paper: CEPR ID: DP15747
Authors: Massimo Massa; Si Cheng; Hong Zhang
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
Keywords: tax evasion; FATCA; mutual funds; skills; market efficiency
JEL Codes: F36; G15; G23; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| implementation of FATCA (F38) | performance enhancement of offshore mutual funds sold to U.S. investors (G23) |
| implementation of FATCA (F38) | performance enhancement of funds domiciled in tax havens (H26) |
| implementation of FATCA (F38) | improvement in price efficiency of stocks held by affected funds (G14) |
| performance enhancement of offshore mutual funds (G23) | market efficiency of stocks held by affected funds (G14) |
| implementation of FATCA (F38) | persistent performance improvements of offshore mutual funds (G23) |