Smart manager and investor effects in offshore financial development: the decisive role of cognitive ability on risk preference

Abstract

ABSTRACT In the aftermath of first world war, offshore finance has garnered the attraction of various quarters. As of 2010, at least USD 21–32 Trillion of unreported private financial wealth, nearly 18% of the aggregate global wealth, was cantered in tax havens. Financial risk management to prevent offshore financial crisis has become an international concern and widely discussed. We examine the dynamic interrelationship between cognitive ability, risk preference and offshore financial development for a global sample of 44 countries for the period 2001–2017 by using simultaneous equation models. The findings reveal that risk preference, as an informal institute, exerts imperceptible influence on offshore financial development. Moreover, as the cognitive ability affects offshore financial development by way of risk preference, there does exist ‘Smart Managers Effect’ and ‘Smart Investors Effect’ determined by the cognitive ability in Offshore Financial Centres. Moreover, our results vindicate the role of ‘Invisible Hand’ of the market during the tension between markets and governments. The study offers a convincing explanation of the impacting path to risk preference, dominated by cognitive ability, on offshore financial development in offshore financial centres from the perspective of the Institutional Economics.