Purpose It is expected that firms will be deterred from engaging with tax havens by formal and informal institutions. However, the understanding of how tax haven use is influenced by varying institutional deterrents and organizational contexts remains limited. Combining the institutional complexity perspective with behavioral theory, this study aims to explore the extent to which formal and informal institutions deter FDI into tax havens. The authors theorize and explain how variance in the organizational context, such as the firm’s degree of managerial discretion and influence act to “sensitize” or “de-sensitize” organizational decision-makers to institutional deterrents. Design/methodology/approach Drawing on a comprehensive data set of tax haven subsidiaries by 2,857 firms between 2009 and 2017, this study provides a firm fixed effect analysis of the relationship between institutional deterrents, firm-level factors and tax haven use. Findings While prior studies had suggested that informal institutions can play a substantive, equal or even dominant role in curtailing undesirable corporate conduct, the results indicate that this may not always be the case. Instead, the authors find that informal institutional deterrence, in the form of enhanced media scrutiny, can oftentimes be weak and even embolden firm tax haven participation. Indeed, the findings further suggest the important role played by formal institutions and firm-level contextual factors in influencing tax haven use. Research limitations/implications By exploring the relationship between institutional deterrents and FDI into tax havens, the authors examined the “functioning” of institutions at a deeper, more granular level. Yet, given the chosen context of FDI into tax havens, the authors focused on a specific government enforcement agency (the UK’s tax enforcement agency and the HMRC). As such, the authors posit that there is still much more to be unearthed by following the approach of “matching” (negative/undesired) corporate conduct with specific enforcement agencies, tasked with permanently upholding institutional policies. Overall, the research generally questions the significance and “quasi-regulatory” role of informal regulatory efforts. Originality/value By exploring the relationship between institutional deterrents and FDI into tax havens, the authors examined the “functioning” of institutions at a deeper, more granular level.
Rewilak et al. (Thu,) studied this question.