Corporate Tax Aggressiveness and Corporate Investment Expenditure in Nigeria and Ghana
Abstract
This paper analyzes the effect of cash flow from corporate tax aggressiveness on corporate investment expenditure in Nigeria and Ghana from 2010 to 2017. The sampled outcome is measured by estimating pooled ordinary least squares, as well as random and fixed effects models. The study uses dynamic models to draw significance because it corrects for endogeneity, cross-sectional dependence, serial correlation, and heteroscedasticity by including instruments that are uncorrelated with the regressors in the underlying routine during estimation. The corporate tax aggressiveness indicators are tax saving, effective tax rate, book-tax difference, and temporary tax difference - with firm size as the control variable. Findings, among others, reveal that tax aggressiveness has a statistically significant influence on corporate investment expenditure in both countries. This provides evidence that tax aggressiveness is positive and that its coefficients are statistically significant to the tax aggressiveness variables; in particular, tax saving and effective tax rate maintained consistent positive and statistically significant relationships to corporate investment expenditure across all model specifications. In other words, an increase in tax saving and effective tax rate boost the total and new investment expenditure in both countries. Other findings show that a large difference between income reported on financial statements and income reported on tax return reduces corporate total and new investment expenditure in both countries. Furthermore, a proportionate increase in investment maintenance expenditure occurs when a book-tax gap changes in Nigeria. This is because managers reduce taxable income in order to increase investment maintenance expenditure. For the control variables, firm size boosts corporate investment expenditure in both countries.
References
Adegbite, T. A. and Shittu, S. A. (2017). The Analysis of the Impact of Corporate Income Tax on Investment in Nigeria. World Wide Journal of Multidisciplinary Research and Development, 3(3):60–64.
Adeleye, B. N., Adedoyin, F., and Nathaniel, S. (2020). The Criticality of ICT-trade Nexus on Economic and Inclusive Growth. Information Technology for Development, 27(2):293–313. https://doi.org/10.1080/02681102.2020.1840323.
Arellano, M. and Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment. Review of Economic Studies, 58(1):277–297. https://doi.org/10.2307/2297968.
Armstrong, C., Blouin, J., and Larcker, D. (2012). The Incentives for Tax Planning. Journal of Accounting and Economics, 53:391–411.
Atwood, T. J. and Reynolds, J. K. (2008). The Pricing of Realized Tax Benefits From NOL Carry Forwards: Effect of Income Statement Presentation. Journal of the American Taxation Association, 30(1):1–27. http://dx.doi.org/10.2308/jata.2008.30.1.1.
Ayers, B. C., Laplante, S. K., Li, O. Z., and Schwab, C. (2010). Investor Trading and Book-Tax Differences. J. M. Tull School of Accounting, pages 1–39.
Beatty, R., Riffe, S., and Welch, I. (1997). How Firms Make Capital Expenditure Decisions: Financial Signals, Internal Cash Flows, Income Taxes and the Tax Reform Act of 1986. Review of Quantitative Finance and Accounting, 9:227–250. https://doi.org/10.1023/A:1008211016618.
Chen, S., Chen, X., Cheng, Q., and Shevlin, T. (2010). Are Family Firms More Tax Aggressive Than Non-family Firms? Journal of Financial Economics, 95:41–61.
Desai, M. A. (2003). The Divergence Between Book and Tax Income. In Poterba, J., editor, Tax Policy and the Economy, volume 17, pages 169–206. National Bureau of Economic Research, Inc.
Dyreng, S. D., Hanlon, M., and Maydew, E. L. (2010). The Effects of Executives on Corporate Tax Avoidance. Accounting Review, 85(4):1163–1189.
Federicil, D. and Parisi, V. (2015). Do Corporate Taxes Reduce Investments? Evidence From Italian Firm-level Panel Data. Cogent Economics and Finance, 3:1–14. https://doi.org/10.1080/23322039.2015.1012435.
Firmansyah, A. and Bayuaji, R. (2019). Financial Constraints, Investment Opportunity Set, Financial Reporting Aggressiveness, Tax Aggressiveness: Evidence from Indonesia Manufacturing Companies. Academy of Accounting and Financial Studies Journal, 23(5):1–18.
Ftouhi, K., Ayed, A., and Zemzem, A. (2010). Tax Planning and Firm Value: Evidence From European Companies. In International Journal Economics and Strategic Management of Business Process. 2nd International Conference on Business, Economics, Marketing and Management Research, volume 4, pages 73–78.
Goldman, N. C. (2016). The Effect of Tax Aggressiveness on Investment Efficiency. PhD thesis, The University of Arizona. http://hdl.handle.net/10150/612100.
Helpman, E., Melitz, M., and Yeaple, S. R. (2004). Export Versus FDI With Heterogeneous Firms. The American Economic Review, 94(1):300–316.
Holland, D. and Vann, R. J. (1998). Income Tax Incentives for Investment. In Thuronyi, V., editor, Tax Law Design and Drafting, volume 2, chapter 23. International Monetary Fund.
Hubbard, R. G. (1998). Capital-market Imperfections and Investment. Journal of Economic Literature, 36:193–225.
Ilaboya, O. J., Izevbekhai, M. O., and Ohiokha, F. I. (2016). Tax Planning and Firm Value: A Review of Literature. Business and Management Research, 5(2):81–91. http://dx.doi.org/10.5430/bmr.v5n2p81.
Kawor, S. and Kportorgbi, H. K. (2014). Effect of Tax Planning on Firms Market Performance: Evidence from Listed Firms in Ghana. International Journal of Economics and Finance, 6(3):162–168. http://dx.doi.org/10.5539/ijef.v6n3p162.
Khurana, I. K. and Moser, W. J. (2009). Shareholder Investment Horizons and Tax Aggressiveness. https://ssrn.com/abstract=2153188.
Lennox, C., Lisowsky, P., and Pittman, J. (2013). Tax Aggressiveness and Accounting Fraud. Journal of Accounting Research, 51(4):739–778. https://doi.org/10.1111/joar.12002.
McGuire, S. T., Omer, T. C., and Wilde, J. H. (2014). Investment Opportunity Sets, Operating Uncertainty, and Capital Market Pressure: Determinants of Investments in Tax Shelter Activities? Journal of the American Taxation Association, 36(1):1–26. https://doi.org/10.2308/atax-50599.
Mills, L., Newberry, K., and Trautman, W. B. (2002). Trends in Book-Tax Income and Balance Sheet Differences. https://ssrn.com/abstract=313040.
Moon, T. S. (2019). Capital Gains Taxes and Real Corporate Investment. Princeton University, pages 1–92.
Myers, S. C. (1977). Determinants of Corporate Borrowing. Journal of Financial Economics, 5:147–175.
Osegbue, I. F., Nweze, A., Ifurueze, M., and Nwoye, C. M. (2018). Effects of Tax Sheltering on Earnings Management in Nigeria. Research Papers in Economics and Finance, 3(2):45–69. https://doi.org/10.18559/ref.2018.2.5.
Plesko, G. A. (2004). Corporate Tax Avoidance and the Properties of Corporate Earnings. National Tax Journal, 57(3):729–737.
PWC (2012a). Worldwide Tax Summaries. Ghana. Corporate. Tax Credits and Incentives. https://taxsummaries.pwc.com/ghana/corporate/tax-credits-and-incentives.
PWC (2012b). Worldwide Tax Summaries. Nigeria. Corporate. Tax Credits and Incentives. https://taxsummaries.pwc.com/nigeria/corporate/tax-credits-and-incentives.
Richardson, S. (2006). Over-investment of Free Cash Flow. Review of Accounting Studies, 11:159–189. https://doi.org/DOI10.1007/s11142-006-9012-1.
Salihu, I. A., Annuar, H. A., and Obid, S. N. (2015). Foreign Investors’ Interests and Corporate Tax Avoidance: Evidence From an Emerging Economy. Journal of Contemporary Accounting and Economics, 11:138–147. http://dx.doi.org/10.1016/j.jcae.2015.03.001.
Seidman, J. K. (2008). Investigating the Book-Tax Income Gap: Factors Which Affect the Gap and Details Regarding its Most Significant Component. PhD thesis, Massachusetts Institute of Technology.
Simone, L. D., Klassen, K. J., and Seidman, J. K. (2018). The Effect of Income-Shifting Aggressiveness on Corporate Investment. In 2017 Berlin Vallendar Tax Conference, pages 1–44.
Sorbe, S. and Johansson, A. (2016). International Tax Planning and Fixed Investment. OECD Economics Department Working Papers No. 1361.
Talisman, J. (1999). Testimony Before the House Committee on Ways and Means. Waluyo (2016). The Relationship Between Book-tax Differences and Earnings Growth Within Indonesian Manufacturing Firms. Research Journal of Finance and Accounting, 7(18):127–133.
Welch, I. and Wessels, D. (2000). The Cross-Sectional Determinants Of Corporate Capital Expenditures: A Multinational Comparison. Schmalenbach Business Review, 52(2):103–136.
World Bank Group (2020). Investment Policy and Regulatory Review 2019. https://www.worldbank.org.
Copyright (c) 2021 by the Author(s)
This work is licensed under a Creative Commons Attribution 4.0 International License.
