Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and Debt Markets

46 Pages Posted: 24 Aug 2011 Last revised: 1 Apr 2013

See all articles by Michelle Hanlon

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Edward L. Maydew

University of North Carolina at Chapel Hill

Jake Thornock

Brigham Young University

Date Written: March 29, 2013

Abstract

We empirically investigate one form of illegal investor-level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round-tripping tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. securities markets. Employing Becker’s (1968) economic theory of crime, we identify the tax evasion component in foreign portfolio investment data by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. To our knowledge, this is the first empirical evidence of investor-level tax evasion affecting cross-border investment in equity and debt markets.

Keywords: Foreign Portfolio Investment, Tax Havens, Tax Evasion

JEL Classification: F21, G15, H26, M41

Suggested Citation

Hanlon, Michelle and Maydew, Edward L. and Thornock, Jacob, Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and Debt Markets (March 29, 2013). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1915429 or http://dx.doi.org/10.2139/ssrn.1915429

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

Edward L. Maydew (Contact Author)

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

Jacob Thornock

Brigham Young University ( email )

Provo, UT 84602
United States
8014220828 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
829
Abstract Views
5,863
Rank
54,546
PlumX Metrics