Paper short abstract:

We make use of Panama and Paradise papers leaked data to conduct a worldwide time series panel regression analysis that assesses the impact of various economic, political, and institutional factors on shell company formation by developing and transition economy clients between 1990 and 2015.

Paper long abstract:

Although we have a qualitative understanding of the various motivations behind offshore shell company use, data availability limitations have long made it difficult to systematically probe the drivers of shell company formation at a quantitative level. Here we make use of leaked data from the Panama and Paradise papers to try to fill this gap, by conducting a worldwide time series panel regression analysis that assesses the impact of various economic, political, and institutional factors on shell company formation by developing and transition economy clients between 1990 and 2015. In addition to highlighting the power of these leaked datasets to support time series panel regression analysis broadly, our results shed novel quantitative light on the specific factors that impact shell company formation. We find what can be described as a “rents-in, rents-out” logic of shell company formation, wherein foreign aid and natural resource rent income are both found to have a significantly positive time series impact on this formation, while no such impact is found for increases in external indebtedness or GDP growth more broadly. We also identify powerful impacts of various types of institutional and political shocks on shell company formation. The nature of these effects is complex, with some types of shocks appearing to temporarily shut down shell company formation, while others trigger it. Which shocks fall into which category is not a-priori obvious, underscoring the need for a systematic quantitative empirical approach to research in this area.