Yes, it does "quit" execution of the function. The question is, "which function?" In this case the answer should be pretty clear: it's the function passed to .each().

You can terminate the looping behavior of .each() by returning false instead of true, but that still won't get you out of the outer function. What you should probably consider is to set up a local variable in the outer function, and have the inner function set that when it finds something (and then break the .each() loop). Then the main function can check the local variable to see if it was set.

This is a case where I'd really like to use a .reduce() or .inject() API, but jQuery doesn't have one and they're really opposed to it.

Return false, rather than true, to terminate the each loop; from the docs:

We can stop the loop from within the callback function by returning false.

That will just terminate your each loop, though, not the overall function. You'll need to set a flag so you know whether you found something, e.g. something like this:

function artistExists(artist) {
// get data from artists.xml 
$('.loading').show();
$.get(artists_xml, function(xml){  
    var found = false;    // <== Added
    $('.loading').hide();
    $(xml).find('artist').each(function(){
        if ($(this).find("ar_artist").text() == artist.val()) {
            alert ('artist exists');
            found = true; // <== Added
            return false; // <== Modified
        } //end if
    });  // end each
    if (!found) {         // <== Added
        alert ('artist does not exist');
    }                     // <== Added
    return found;         // <== Modified
}); // end .get function
} // end of artistExists function

$.get is an asynchronous function, that means, the main function, artistExists will return immediately, and a GET request will be initiated. To be able to get the result you will need a callback.

function artistExists(artist, cb) {
    $('.loading').show();
    $.get(artists_xml, function(xml) {

        var found = false;

        $('.loading').hide();

        $(xml).find('artist').each(function(){
            if ($(this).find("ar_artist").text() == artist.val()) {
                found = true;
                return false; // use return false to stop .each()
            }
        });

        // the built in action.
        if (found) {
            alert ('artist exists');
        } else {
            alert ('artist does not exist');
        }

        // call the callback function
        cb (found);

    });
}

Then to use, you need to use a callback function. From

var isExists = artistExists('lol');
// do stuff

You need to change it to:

artistExists('lol', function(isExists) {
    // do stuff
});