Summary

In our recent publication in the Journal of Management Studies, we investigate the intriguing dynamics behind corporate decisions to relocate headquarters across borders for tax benefits. While these moves can be financially beneficial for corporations, they often result in reduced local tax revenues and job losses. Our study reveals a selective pattern in the influence of socially-responsible large shareholders on these decisions. We find that such shareholders are more inclined to intervene when they share the same nationality as the company, indicating the presence of an ‘affinity bias’. CEO characteristics also shape this bias, as the restraining influence of domestic shareholders is stronger in firms with a domestic CEO compared to those with a foreign CEO. Our study sheds light on subtle but powerful dynamics that shape corporate ethics and strategic decisions.

Responsible shareholders rein in tax-motivated relocations.

In our paper, we aimed to understand the influence of socially-responsible large shareholders (or ‘blockholders’) on decisions to relocate headquarters internationally for tax benefits. While it might be assumed that such shareholders, including public pension funds and founding family members, would uniformly oppose these relocations, our findings suggest a more nuanced reality.

Tax-driven relocations, though advantageous for firms, strip local governments of crucial tax income and often negatively impact local employment. It seems logical that firms, especially those controlled by socially-responsible blockholders, would be wary of such moves. Our results however reveal that responsible blockholders are more proactive in preventing these relocations when such blockholders are domestic rather than foreign, indicating a tendency to prioritize local concerns.

Nationality influence in corporate decisions.

The study highlights a clear trend: responsible large shareholders are more committed to preventing relocations out of their own home country. This suggests that their sense of responsibility extends more strongly towards stakeholders of their own nationality, indicating a discernible affinity bias. The research also emphasizes the significant influence of CEOs in this context, finding that domestic shareholders are more effective in curbing tax-motivated relocations when a firm’s CEO is also domestic.

Hand-collected data reveal responsible shareholder and CEO bias.

The quantitative analysis in this paper is based on a hand-collected dataset of 89 announced tax inversions by listed U.S. firms. The results confirm that socially-responsible blockholders, especially those sharing their firm’s nationality, significantly reduce the likelihood of a tax-driven relocation being undertaken. This constraining influence however is significantly attenuated when their nationality differs from that of the CEO, especially in scenarios with predominantly foreign blockholders. These findings highlight the subtle but powerful role of national identity among socially-responsible blockholders and CEOs in shaping corporate ethics and decision making.

Implications.

By revealing that socially-responsible large shareholders, particularly domestic ones, help prevent headquarters relocations, our study enables policymakers to identify which domestic firms are most at risk of relocating and develop targeted policies to retain these firms within the country.  Moreover, our finding that domestic CEOs tend to be more sensitive to pressure from domestic shareholders can help CEOs avoid giving such shareholders excessive influence, resulting in corporate decisions that more accurately reflect the interests of different shareholders.