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

Advances in Decision Sciences, 2024, vol. 28, issue 3, 1-24

Abstract: [Objective] This research examines how a country’s culture affects a company’s decisions regarding financing and corporate tax rates. [Design/methodology/approach] 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] 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.

Keywords: Corporate Tax Rate; National Culture; Firm Financing; Fixed Effect Model; Debt Financing; Equity Financing; Capital Structure (search for similar items in EconPapers)
JEL-codes: G31 G32 H25 Z10 (search for similar items in EconPapers)
Date: 2024
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