With the Cats Away, Do Mice Come Out to Play? Institutional Pressure and Tax Havens

Abstract

Institutions are expected to play a critical role in deterring corporate social irresponsibility, such as when firms use and abuse tax havens. However, research concerning how formal and informal institutional pressure deters international business misconduct, remains underdeveloped. Combining the institutional complexity perspective and behavioral theory, we attend to this gap by examining how changes in the resourcing of formal institutional bureaus - such as those tasked with tax investigation - as well as shifting informal institutional pressure - namely media scrutiny - influence firm decisions to internationalize into tax havens. Utilizing a unique and granular dataset of tax haven subsidiaries between 2008-18, we theorize that organizations are deterred to internationalize into tax havens following enhanced formal institutional pressure, with informal institutions generally exerting relatively weaker pressures on firms. In turn, managerial discretion, as well as the degree of firm influence, act to moderate the relationship between institutional pressures and internationalization into tax havens. Among our central contributions, this study advances theory on the role played by specific formal and informal institutions in the ‘dark side’ of international business activities.