Funding: This study received funding from the European Union – Next-GenerationEU – National Recovery and Resilience Plan (NRRP) – MISSION 4 COMPONENT C2, INVESTMENT 1.1, CALL PRIN 2022 PNRR D.D. 1409 14/09(2022, entitled “The effect of organized crime on firm technical efficiency and R&D investments” – ID P20227XY5N_003, CUP C53D23008900001 (University “Dante Alighieri” of Reggio Calabria – Italy) – ID P20227XY5N, CUP MASTER J53D23016850001 (University of Messina).
This study examines a “control paradox” through the lens of institutionalized agency theory: under severe institutional decay, firms may rationally weaken, rather than strengthen, governance as a strategic adaptation. Using firm-level data on 13,084 Italian SMEs matched with a provincial organized crime index, we run robust regressions linking criminal exposure to a composite measure of the size of SMEs’ two key internal boards (Board of Directors and Board of Statutory Auditors). We find that higher organized crime intensity is associated with smaller administrative and control boards, even after accounting for firm and environmental determinants. Our findings contribute to theory by demonstrating the boundary conditions of traditional agency and risk-based governance models, showing how institutional decay systematically reshapes agents’ incentives and thereby the role of internal governance as an adaptive, agentic response.
Keywords: Organized Crime, Internal Control Systems, Corporate Governance, Control paradox, Institutionalized Agency Theory, Italian SMEs
