Corporate Governance as a Red Flag to Thin Capitalization: Study of Corporate Governance Variables Influencing Thin Capitalization in Ghana

Author(s)

Prince Asare Vitenu-Sackey , Collins Jerry Boateng ,

Download Full PDF Pages: 49-65 | Views: 911 | Downloads: 275 | DOI: 10.5281/zenodo.3496903

Volume 8 - July 2019 (07)

Abstract

The main purpose of this study was to assess the impact corporate governance has on thin capitalization in Ghana. In view of this, the study aims to; investigate corporate governance variables determining thin capitalization practices in Ghana and also ascertain the depth at which corporate governance affect thin capitalization. The study used panel data of 42 listed companies on the Ghana stock exchange market for the period 2014 to 2018. The study used panel data methodologies such as panel correlation matrix, co-integration tests, robust least square, and granger causality test. The study found that corporate governance has a significant impact on thin capitalization thus the employment of external auditors tend to report the true picture of firms and disclosure of directors’ reports reveal the true position of corporation hence it negatively affect thin capitalization. Meanwhile, the background of the board of directors, the age of the board and concentrated ownership of firms as in family ownership positively impact thin capitalization thereby increases thin capitalization. To increase leverage in firms, the study found that private ownership has more advantage to increases a firm’s leverage whiles state owned firms decreases a firm’s leverage

Keywords

Thin capitalization; corporate governance: list companies in Ghana

References

  1. Armstrong, C. S., Blouin, J. L., & Larcker, D. F. (2012). The incentives for tax planning. Journal of Accounting and Economics, 53(1-2), pp.391-411.
  2. Armstrong, C. S., Blouin, J. L., Jagolinzer, A. D., & Larcker, D. F. (2015). Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17.
  3. Chaudhry, N. (2016). Effect of Tax Avoidance Activities on Firm-Specific Risk.
  4. Shackelford, D. A., & Shevlin, T. (2001). Empirical tax research in accounting. Journal of accounting and economics, 31(1-3), pp.321-387.
  5. Hanlon, M & Heitzman, S., (2010). “A review of tax research” Journal of Accounting and Economics, Vol. 50, pp.127-178.
  6. Gupta, S., & Newberry, K. (1997). “Determinants of variability in corporate effective tax rates: Evidence from longitudinal data”, Journal of Accounting and Public Policy, Vol. 16, pp.1-34
  7. Rego, S. O. (2003). Tax‐avoidance activities of US multinational corporations. Contemporary Accounting Research, 20(4), pp.805-833.
  8. Richardson, G., Taylor, G., & Lanis, R. (2013). The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), pp.68-88.
  9. Fairless, T., (2015). Huge profit stokes concerns over starbuck’s tax practices in Europe. The Wall Street Journal, April 6.
  10. Desai, M. A., & Dharmapala, D. (2008). Tax and corporate governance: an economic approach. In Tax and corporate governance. Springer, Berlin, Heidelberg, pp.13-30.
  11. Pratama, A. (2017). Does Corporate Governance Reduce Thin Capitalization Practice? The Case of Indonesian Manufacturing Firms. Review of Integrative Business and Economics Research, 6(4), pp.276.
  12. Oler, M., Shevlin, T., & Wilson, R. (2007). Examining investor expectations concerning tax savings on the repatriations of foreign earnings under the American Jobs Creation Act of 2004. Journal of the American Taxation Association, 29(2), pp.25-55.
  13. Qiu, D. (2009). Thin Capitalization Rules in China.
  14. Armstrong, C. S., Blouin, J. L., Jagolinzer, A. D., & Larcker, D. F. (2015). Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17.
  15. Leite Santa, S. L., & Rezende, A. J. (2016). Corporate tax avoidance and firm value: from Brazil. Revista Contemporânea de Contabilidade, 13(30).
  16. Al-Dhamari, R. A., Al-Gamrh, B., Ismail, K. N. I. K., & Ismail, S. S. H. (2018). Related party transactions and audit fees: the role of the internal audit function. Journal of Management & Governance, 22(1), pp.187-212.
  17. Zhu, C., & Wu, L. (2009). The auditors’ reaction to the companies’ accounting and financial irregularities–Analysis of the punishment bulletins of the CSRC, SSE, and SZSE. Audit Research, 4, pp.42-51.
  18. Xiangbing, Y. Z. X. (2008). Economic Consequence of Fraudulent Financial Reporting of China's Listed Companies Market Reaction on Publicity of Penalty by CSRC and Ministry of Finance [J]. Auditing Research, 1.
  19. Cheng, Q., Du, F., Wang, X., & Wang, Y. (2013). Are Investors’ Corporate Site Visits Informative?. In Annual Research Conference of Chinese Accounting Professors' Association of North America (CAPANA). Chinese Accounting Professors' Association of North America (CAPANA).
  20. Buettner, T., Overesch, M., Schreiber, U., & Wamser, G. (2012). The impact of thin-capitalization rules on the capital structure of multinational firms. Journal of Public Economics, 96(11-12), 930-938.
  21. Weichenrieder, A. J., & Windischbauer, H. (2008). Thin-capitalization rules and company responses-Experience from German legislation.
  22. Nicodano, G., & Regis, L. (2018). A trade-off theory of ownership and capital structure. Journal of Financial Economics.
  23. Kieschnick, R., & Moussawi, R. (2018). Firm age, corporate governance, and capital structure choices. Journal of Corporate Finance, 48, pp.597-614.
  24. Nadarajah, S., Ali, S., Liu, B., & Huang, A. (2018). Stock liquidity, corporate governance and leverage: New panel evidence. Pacific-Basin Finance Journal, 50, 216-234.
  25. Haufler, A., & Runkel, M. (2012). Firms' financial choices and thin capitalization rules under corporate tax competition. European Economic Review, 56(6), 1087-1103.
  26. Liedong, T. A., & Rajwani, T. (2018). The impact of managerial political ties on corporate governance and debt financing: Evidence from Ghana. Long Range Planning, 51(5), 666-679.
  27. Gresik, T. A., Schindler, D., & Schjelderup, G. (2017). Immobilizing corporate income shifting: Should it be safe to strip in the harbor?. Journal of Public Economics, 152, 68-78.
  28. Atanassov, J., & Mandell, A. J. (2018). Corporate governance and dividend policy: Evidence of tunneling from master limited partnerships. Journal of Corporate Finance, 53, 106-132.
  29. Teplova, T. V., & Sokolova, T. V. (2018). Surprises of corporate governance and Russian firm’s debt. Journal of Economics and Business.
  30. Fuest, C., & Hemmelgarn, T. (2005). Corporate tax policy, foreign firm ownership and thin capitalization. Regional Science and Urban Economics, 35(5), 508-526.
  31. Overesch, M., & Wamser, G. (2010). Corporate tax planning and thin-capitalization rules: evidence from a quasi-experiment. Applied Economics, 42(5), 563-573.
  32. Cheung, D. K. (2012). The Law and Practice of Thin Capitalization Rules in China. Int'l Tax J., 38, 53.
  33. Lei, Q., & Chen, H. (2019). Corporate Governance Boundary, Debt Constraint, and Investment Efficiency. Emerging Markets Finance and Trade, 55(5), 1091-1108.
  34. Akram, H. M. I., Shahzad, A., & Ahmad, I. (2018). The Impact of Corporate Governance on the Working Capital Management Efficiency of Pakistani Manufacturing Firms. IUP Journal of Applied Finance, 24(4).
  35. Baron, R. M., & Kenny, D. A. (1986). The Moderator-Mediator Variable Distinction in Social Psychological Research: Conceptual, Strategic, and Statistical Considerations. Journal of Personality and Social Psychology, 51(6), 1173-1182
  36. Buettner, T., Overesch, M., Schreiber, U., & Wamser, G. (2012). The impact of thin-capitalization rules on the capital structure of multinational firms. Journal of Public Economics, 96(11-12), 930-938.
  37. Hasan, M. S., & Omar, N. (2015). The impact of firm’s level corporate governance on market capitalization. Journal of Investment and Management, 4(4), 119-131.
  38. Legenzova, R. (2008). Valuation of Lithuanian companies’ ownership structure relationship with the financial information presentation. Economics and Management, 2008, 48-54.
  39. Overesch, M., & Wamser, G. (2010). Corporate tax planning and thin-capitalization rules: evidence from a quasi-experiment. Applied Economics, 42(5), 563-573.
  40. Martins, A. (2012) ‘Thin capitalization and its practical application in Portugal: Anote’, International Journal of Law and Management, Vol. 54 No. 4, pp.274−283.
  41. Darussalam, Hutagaol, J. and Sept iriadi, D. (2007) Konsep dan Aplikasi Perpajakan Internasional[Basic Concept of International Taxation], Danny Darussalam Tax Center, Jakarta.
  42. Panayi, C. (2015) ‘Is aggressive tax planning socially irresponsible?’ Intertax, Vol. 43 No. 10, pp.544−558.
  43. Schoen, W. (2008) ‘Statutory avoidance and disclosure rules in Germany’, in Freedman, J. (Ed.), Beyond Boundaries, Oxford University Centre for Business Taxation, Oxford, pp.47−55.
  44. Cheng, Q., Du, F., Wang, X., & Wang, Y. (2016). Seeing is believing: Analysts’ corporate site visits. Review of Accounting Studies, 21(4), 1245-1286.
  45. Jiang, X., & Yuan, Q. (2018). Institutional investors' corporate site visits and corporate innovation. Journal of Corporate Finance, 48, 148-168.
  46. Lu, X. W., Fung, H. G., & Su, Z. Q. (2018). Information leakage, site visits, and crash risk: Evidence from China. International Review of Economics & Finance, 58, 487-507.
  47. Taylor, G., & Richardson, G. (2013). The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), 12-25.
  48. Fathi, J. (2013). Corporate governance and the level of financial disclosure by Tunisian firm. Journal of Business Studies Quarterly, 4(3), 95-111.
  49.  Grace, O. O & Adegbemi, O. B. (2016) Tax planning and financial performance of nigerian manufacturing companies. International Journal of Advanced Academic Research, pp. 64
  50. Lanis, R., Richardson, G., Liu, C., & McClure, R. (2018). The impact of corporate tax avoidance on board of directors and CEO reputation. Journal of Business Ethics, 1-36.
  51. Christian, C., & Henry, C. (2015). Thin capitalisation and illicit financial flows in Africa-Acse of Zambia's mining sector.
  52. Mulyadi, M. S., & Anwar, Y. (2015). Corporate governance, earnings management and tax management. Procedia-Social and Behavioral Sciences, 177, 363-366.
  53. Hardiningsih, P., Hadi, T. P., & Ariani, N. (2019, July). Determinant Earnings Persistence with Corporate Governance as Moderating Factors. In International Conference on Banking, Accounting, Management, and Economics (ICOBAME 2018). Atlantis Press.
  54. Hoffman, W. H. (1961). The theory of tax planning. The Accounting Review, 36(2), pp.274.
  55. Salamon, L. M., & Siegfried, J. J. (1977). Economic power and political influence: The impact of industry structure on public policy. American Political Science Review, 71(3), 1026-1043.
  56. Webber, S. (2010). Thin capitalization and interest deduction rules: a worldwide survey. Tax notes international, 60(9), 683-708.

Cite this Article: