Tax Evasion and Managerial Incentives: Evidence from the FATCA and Offshore Mutual Funds

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.