Corporate Earnings Retention Practices in Africa: Does Being Foreign Really Matter?
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Date
2021-11-18
Authors
Ezeoha, Abel E.
Okeke, Obiajulu C.
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
This paper examines the earnings retention practices of incorporated firms in Africa.
It hypothesizes that foreign and local firms operating in Africa have similar retention
policies, and by extension similar tendency for capital exports. It makes use of robust
descriptive and empirical methodology involving 444 (and 293 for the empirical
analysis) listed firms, in 13 exchanges over the period 2005‒2018. The results show
that corporate earnings retention is context sensitive; and that being foreign is
indeed a deciding factor. The empirical evidence, based on the application of system
dynamic GMM estimation procedure, further reveals that: firms with majority foreign
interests are less likely to pursue aggressive earnings retention policies; earnings
retention declines with increase in foreign interests; for foreign firms mostly, increase
in the burden of effective tax payment significantly undermines earnings retention
capacities of firms; and for local firms largely, increased investments in fixed assets
provides a viable policy option for improving access to the external markets for
corporate finance. The results also show that growth-oriented foreign and local
firms are more likely to employ aggressive earnings retention policies to minimize
their exposure to external capital markets. The paper concludes that, indeed being
foreign matters in the earnings retention and internal capital markets debate in
Africa, although firm-specific characteristics simultaneously play significant role
in moderating the incentive of foreign companies (particularly the MNCs) to retain
rather than repatriate profits. Evidence from this study therefore calls for the need
for policy and capital control emphases to be shifted to deal with how firms (foreign
and local) manage their internal capital market operations. The interactive impact
also suggests that tax payment remains a functional mechanism for moderating the
negative impact of tax on corporate earnings retention behaviour.
Description
Keywords
Earnings retention; , Internal firm characteristics; , Capital export; , Foreign firms