Tax-Motivated Relocations of Headquarters: The Role of Affinity Bias among Socially-Responsible Blockholders and CEOs

While socially-responsible large shareholders have been shown to have a substantial impact on corporate leaders’ decisions on social responsibility, prior research remains silent on whether that impact is subject to bias among these two sets of actors. To shed light on this issue, we study the role of socially-responsible blockholders as well as CEOs in the occurrence of tax-motivated international relocations of corporate headquarters (HQs) – a key form of shareholder-oriented behaviour. Drawing on stewardship theory and corporate governance research, we first hypothesize that responsible blockholders’ total equity stake in a firm is negatively related to a firm's propensity to undertake a tax-motivated HQ relocation. Using complementary insights from social identity theory, we then propose that both socially-responsible blockholders and CEOs tend to identify more strongly with compatriots than with foreigners. This leads us to hypothesize that (a) the stake of responsible domestic blockholders is more negatively related to a firm's relocation propensity than the stake of responsible foreign blockholders, and that (b) the stake of responsible blockholders that are compatriots of their firm's CEO is more negatively related to that propensity than the stake of responsible blockholders with a different nationality than the CEO's. Logit analyses of a sample of US firms covering the period 1998–2017 lend substantial support to our hypotheses, indicating that affinity bias among socially-responsible blockholders and CEOs shapes the occurrence of a key form of shareholder-oriented behaviour.