Examining the Interplay between Tax Systems and Corporate Finance across Diverse Asian Economies

Suzan Sameer Issa; Adel Ahmed; Mosab I. Tabash; Md. Rehan Khan; Zilola Shamansurova; Umar Farooq

doi:10.47654/v28y2024i3p1-24

Authors

Suzan Sameer Issa Faculty of Administrative & Financial Sciences, University of Petra, Amman, Jordan Author
Adel Ahmed Amity Business School, Amity University Dubai, Dubai International Academic City, United Arab Emirates Author
Mosab I. Tabash College of Business, Al Ain University, Al Ain, United Arab Emirates Author
Md. Rehan Khan STS, Minto Circle, Aligarh Muslim University, Aligarh - U.P., India Author
Zilola Shamansurova Department of Finance and Financial Technologies, Tashkent State University of Economics, Uzbekistan Author
Umar Farooq School of Economics and Finance, Xi’an Jiaotong University, Xi’an, Shaanxi, P. R. China Corresponding Author

DOI:

https://doi.org/10.47654/v28y2024i3p1-24

Keywords:

Corporate Tax Rate, National Culture, Firm Financing, Fixed Effect Model, Debt Financing, Equity Financing, Capital Structure

Abstract

Objective: This research examines how a country's culture affects a company's decisions regarding financing and corporate tax rates.

Methodology: We used a two-step system called the Generalized Method of Moment (GMM) to analyze data from five major Asian economies (China, India, Pakistan, South Korea, and Singapore) from 2010 to 2019.

Findings: Our findings suggest a positive correlation between corporate tax rates and debt financing. Increased corporate taxes lead to high tax deduction value, incentivizing firms to enhance their debt financing after-tax income. Furthermore, corporations in a more tax environment prefer leverage financing to exploit the tax deductibility of interest payments. However, this relationship can become negative due to the influence of national culture. In economies with a low power distance culture and less information asymmetry, managers prefer equity financing to debt financing. Reliability, moral sympathy, and trust can attract investors, shareholders, and other stakeholders' attention in these cultures. Similarly, in cultures with low uncertainty avoidance, people are less risk-averse and prefer equity financing to debt financing.

Implications: Corporate managers should consider national culture when deciding on financing patterns, especially when dealing with high corporate tax rates.

Novelty and Originality: This research stands out due to its novel approach of integrating national cultural factors as moderating variables in analyzing corporate tax rates and financing patterns. Unlike previous studies, this research provides a holistic perspective that underscores the importance of cultural context in financial decision-making processes, thereby offering new insights and practical implications for corporate managers and policymakers aiming to optimize financial strategies in culturally diverse settings.

This study is pertinent to decision sciences as it delves into corporate managers' intricate decision-making processes influenced by taxation regimes and cultural dynamics. By clarifying the moderating role of national culture on corporate financial strategies, this research provides valuable insights into the strategic considerations that underpin corporate finance decisions in diverse economic and cultural contexts.

References

Adelino, M., Ma, S., & Robinson, D. (2017). Firm age, investment opportunities, and job creation. The Journal of Finance, 72(3), 999-1038.

Akron, S., Demir, E., Díez-Esteban, J. M., & García-Gómez, C. D. (2020). Economic policy uncertainty and corporate investment: evidence from the US hospitality industry. Tourism Management, 77(1), https://doi.org/10.1016/j.tourman.2019.104019.

AL-Gharaibeh, M., Ali, A., Farooq, U., & Al-haddad, L. (2023). The Interaction Between Asset Tangibility, Cash Holdings, and Financial Development: An Evidence from Emerging Economy. Advances in Decision Sciences, 27(4), 114-132. Retrieved from https://doi.org/10.47654/v27y2023i4p114-132

Al-Haddad, L., Al-Abed, S., QaQish, R. K., Marashdeh, Z., & Al-Hamad, A.-S. A. (2023). Does Volatility in Air Pollution Index Affect Firm Financing Pattern? Advances in Decision Sciences, 27(4), 1-23. Retrieved from https://doi.org/10.47654/v27y2023i4p1-23

Alstadsæter, A., Jacob, M., & Michaely, R. (2017). Do dividend taxes affect corporate investment? Journal of Public Economics, 151(1), 74-83.

Andrieu, G., Staglianò, R., & Van Der Zwan, P. (2018). Bank debt and trade credit for SMEs in Europe: firm-, industry-, and country-level determinants. Small Business Economics, 51, 245-264.

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The review of economic studies, 58(2), 277-297.

Arosa, C. M., Richie, N., & Schuhmann, P. W. (2014). The impact of culture on market timing in capital structure choices. Research in International Business and Finance, 31(1), 178-192.

Asiri, M., Al-Hadi, A., Taylor, G., & Duong, L. (2020). Is corporate tax avoidance associated with investment efficiency? The North American Journal of Economics and Finance, 52(1).

Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital Structures in Developing Countries. The Journal of Finance, 56(1), 87-130 ( https://doi.org/10.1111/0022-1082.00320).

Castro, F., Kalatzis, A. E., & Filho, C. M. (2015). Financing in an emerging economy: Does financial development or financial structure matter? Emerging Markets Review, 23(1), 96-123.

Devereux, M. P., Maffini, G., & Xing, J. (2018). Corporate tax incentives and capital structure: New evidence from UK firm-level tax returns. Journal of Banking & Finance, 88(1), 250-266.

Dobbins, L., & Jacob, M. (2016). Do corporate tax cuts increase investments? Accounting and Business Research, 46(7), 731-759.

Du, J., Shen, G., & Zou, J. (2023). Tax incentives and firm financing structures: evidence from China’s accelerated depreciation policy. International Tax and Public Finance, 30(5), 1346-1373. Retrieved from https://doi.org/10.1007/s10797-022-09762-w

Faccio, M., & Xu, J. (2015). Taxes and Capital Structure. Journal of Financial and Quantitative, 50(3), 277-300.

Farooq, U., Ahmed, J., Ashfaq, K., Khan, G. U., & Khan, S. (2020). National culture and firm financial performance: A mediating role of firm financing decision. Cogent Business & Management, 7(1), 1-21.

Farooq, U., Anagreh, S., Al-Omari, M. A., & Tabash, M. I. (2022). Corporate Tax Rate, Financing Policy, and Investment Decisions: Evidence from 8 Asian Economies. Hacienda Publica Espanola/Review of Public Economics, 242(3), 29-51.

Feld, L. P., Heckemeyer, J. H., & Overesch, M. (2013). Capital structure choice and company taxation: A meta-study. Journal of Banking and Finance, 37(8), 2850-2866.

Fuller, K. P., Wu, Q., & Yildiz, S. (2024). Corporate debt policy and tax uncertainty. Review of Quantitative Finance and Accounting, 62(1), 247-270. https://doi.org/10.1007/s11156-023-01202-y

Haq, M., Hu, D., Faff, R., & Pathan, S. (2018). New evidence on national culture and bank capital structure. Pacific-Basin Finance Journal, 50(1), 41-64 (https://doi.org/10.1016/j.pacfin.2017.09.005).

Hofstede, G. (2001). Culture's consequences: Comparing values, behaviors, institutions and organizations across nations. Sage publications, 616.

Holtz-Eakin, D., Newey, W., & S. R, H. (1988). Estimating vector autoregressions with panel data. Econometrica: Journal of the econometric society, 1371-1395.

Hsiao, H. F., Zhong, T., & Wang, J. (2024). Does national culture influence corporate social responsibility on firm performance?. Humanities and Social Sciences Communications, 11(1), 1-9. https://doi.org/10.1057/s41599-023-02538-5

Huynh, K. P., & Petrunia, R. J. (2020). Age effects, leverage and firm growth. Journal of Economic Dynamics and Control, 34(5), 1003-1013.

Lim, S. C., Macias, A. J., & Moellera, T. (2020). Intangible assets and capital structure. Journal of Banking & Finance, 118.

Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261-297.

Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), 433–443.

Mokhova, N., & Zinecker, M. (2014). Macroeconomic Factors and Corporate Capital Structure. Procedia - Social and Behavioral Sciences, 110(1), 530-540.

Muthitacharoen, A. (2021). Tax Rate Cut and Firm Investment: Evidence from Thailand. Applied Economics Letters, 28(3), 220-224.

Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 12(2), 187-221.

Nenu, E. A., Vintilă, G., & Gherghina, Ş. C. (2018). The impact of capital structure on risk and firm performance: Empirical evidence for the Bucharest Stock Exchange listed companies. International Journal of Financial Studies, 6(2), 41.

Ohrn, E. (2018). The effect of corporate taxation on investment and financial policy: Evidence from the DPAD. American Economic Journal: Economic Policy, 10(2), 272-301.

Salim, M., & Yadav, R. (2012). Capital structure and firm performance: Evidence from Malaysian listed companies. Social and Behavioral Sciences, 65(1), 156-166.

Sankarganesh, K., & Shanmugam, K. R. (2021). Effect of corporate income tax on investment decisions of Indian manufacturing firms. Journal of the Asia Pacific Economy, (1-20) https://doi.org/10.1080/13547860.2021.1873896.

Shao, L., Kwok, C. C., & Guedhami, O. (2010). National culture and dividend policy. Journal of International Business Studies volume, 41(8), 1391–1414.

Sobiech, A. L., Chronopoulos, D. K., & Wilson, J. O. (2021). The real effects of bank taxation: Evidence for corporate financing and investment. Journal of Corporate Finance, 69(1), https://doi.org/10.1016/j.jcorpfin.2021.101989.

Subhani, B. H., Farooq, U., Ashfaq, K., & Tabash, M. I. (2024). How country governance situation affect firm financing arrangements: empirical evidence from selected Asian economies. Society and Business Review, 19(2), 230-248. https://doi.org/10.1108/SBR-12-2022-0314

Subhani, B. H., Farooq, U., Bhatti, I. I., & Khan, M. A. (2021). Economic Policy Uncertainty, National Culture, and Corporate Debt Financing. Sustainability, 13(20), https://doi.org/10.3390/su132011179.

Taylor, G., Al-Hadi, A., Richardson, G., Alfarhan, U., & Yahyaee, K. A. (2019). Is there a relation between labor investment inefficiency and corporate tax avoidance? Economic Modelling, 81(1), 185-201.

Vy, L. T., & Phan, T. B. (2017). Capital structure and firm performance: Empirical evidence from a small transition country. Research in International Business and Finance, 42((C)), 710-726.

Wu, L., & Yue, H. (2009). Corporate tax, capital structure, and the accessibility of bank loans: Evidence from China. Journal of Banking & Finance, 33(1), 30-38.

Zhou, Y., Dai, J., Farooq, U., Ahmed, J., & Sergeevna, K. N. (2023). National Culture as a Determinant of Corporate Capital Structure: Empirical Evidence from Three Emerging Economies. Advances in Decision Sciences, 27(2), 122-144. Retrieved from https://doi.org/10.47654/v27y2023i2p122-144