This study explores how SME managers in Spain and Sweden differ in their moral reasoning about grey-zone practices, defined as business practices that exist between full legal compliance and social acceptability. Drawing on Scott’s Three Pillars of Institutions (regulative, normative, and cultural-cognitive) and using legitimacy theory as a supplementary interpretive lens, the study examines how formal institutional constraints, social norms, and cultural assumptions shape managerial evaluations of such practices. A qualitative comparative research design was employed, based on six semi-structured interviews with SME managers operating in Spain and Sweden. The data were analysed using thematic analysis. The findings reveal significant cross-national differences in managerial reasoning. Spanish managers more frequently justified grey-zone practices through pragmatic considerations, relational obligations, and contextual flexibility, reflecting weaker enforcement, lower institutional trust, and greater social tolerance of informality. In contrast, Swedish managers more often evaluated such practices through compliance-oriented reasoning, emphasising institutional trust, worker protection, long-term consequences, and collective responsibility. The study further finds that social acceptability functions as a mediating mechanism between formal legality and managerial evaluation, helping explain why practices that are formally non-compliant may still be perceived as legitimate within certain contexts. By integrating institutional theory, cultural perspectives, and legitimacy theory, this thesis contributes to the understanding of how institutional environments shape moral reasoning about grey-zone practices and offers insights into the relationship between legality, legitimacy, and social acceptability in SME contexts.