University of Economics, Prague. Financial Performance and Effective Tax Rates of Czech Subsidiaries under Foreign Control

Transcription

1 University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Financial Performance and Effective Tax Rates of Czech Subsidiaries under Foreign Control ECE 2017 Brno, 09 March David Procházka

2 Agenda Background and literature review Methodology and sample Results Discussion and conclusions

3 1 Background and literature review David Procházka Mixed evidence on the influence of ownership structure on corporate financial performance: - exogenous (Thomsen and Pedersen 2000) vs endogenous (Demsetz and Villalonga 2001) view of ownership market advantages vs agency problems The motives of acquisition on another company (Yang, Mudambi, and Meyer 2008): - value-creation - value-exploitation 50% of Czech industrial output produced by firms under foreign control (Ernest 2014) General business research on parent-subsidiary links: - positive impact on subsidiaries performance by transfers from parents (Delios and Beamish 2001), (Fang et al. 2007), (Gaur, Delios, and Singh 2007), (Fang et al. 2010) - transfers help in overcoming shortages in institutional environment (Fey and Björkman 2001), (Luo 2003), (Albu, Lupu, and Sandu 2014)

4 - specific information flows, if subsidiaries in transition countries (Cui et al. 2006), (Yang, Mudambi, and Meyer 2008) - the main restriction is the attitude of a subsidiary to the institutional duality (Oliver 1991), (Kostova and Roth 2002) Hypotheses: - H1: The domicile of parent company (listed at EU capital markets) does not have effect on the financial performance of the Czech subsidiaries - H2: There are no differences in effective tax rates of the Czech subsidiaries, because of different domicile of parent company (listed at EU capital markets) Expected results unclear, because: - different market forces influencing the parents reporting incentives - parents may support subsidiaries in maximising the value creation to meet or beat capital market expectations in the long-run - alternatively, parents may follow the exploitation strategy on a given market to meet or beat capital market expectations in the short-run

5 2 Methodology and sample Financial performance evaluated by ROA (EBIT/Assets) and ROE (EAT/Equity) Taxation evaluated by ETR (CIT/EBT) Sample: - Amadeus database used to identify the EU-parent vs Czech-subsidiary links - Albertina database used to retrieve financial data on subsidiaries Only non-financial companies covered: - 1,347 companies included - 5,033 firm-year observations for the period

6 Tab. 1: Distribution of ROA, ROE, ETR ROA (%) Total Median Mean SD ROE (%) Total Median Mean SD ETR (%) Total Median Mean SD

7 3 Results ROA: David Procházka - the best scores: companies with Spanish parents (6-year average of 12.7%), followed by firms under control of German and Swedish parents (average ROA of 11.9%) - the worst scores: Malta (2.7%), Portugal (0.4%), and Hungary 1.5% ROE: - the best: Spain 21.3%, France 17.9%, and Sweden 17.7% - the worst: Malta (35.7%), Slovakia (9.7%), and Greece (9.1%) ETR: - the best: Croatia 22.9%, Spain 19.6%, and Slovenia 18.7% - the worst: Malta 0.0%; Portugal 2.5%, and Greece 4.1% Limitation: - Cyprus, Greece, Croatia, Malta, Hungary, Portugal, and Slovenia < 30 observations

8 Tab. 2: Factorial ANOVA tests ROA Df Sum sq Mean sq F-statistic P-value Parent 15 32,336 2, * Industry 13 22,741 1, * Parent: Industry ,125 1, * Residuals 4,777 1,196, ROE Df Sum sq Mean sq F-statistic P-value Parent ,447 9, * Industry 13 59,860 4, * Parent: Industry ,308 4, * Residuals 4,777 5,251,847 1,099 ETR Df Sum sq Mean sq F-statistic P-value Parent 15 33,104 2, * Industry 13 11, ** Parent: Industry , * Residuals 4,777 1,959,

9 4 Discussion and conclusions David Procházka ETRs of Czech subsidiaries under control of foreign listed parents are significantly lower than for other Czech companies Despite exhibiting certain tax avoidance, data reveal high variability in relative tax rates: - many foreign parents from the big EU economies prefer to tax profits in the Czech Republic rather than to shift them elsewhere - parents from the southern EU countries (especially Cyprus, Malta, Greece, and Portugal) search the ways how to avoid taxation The analysis of variance reveals also heterogeneity in performance both across industries and parents jurisdiction => future research shall examine the direction, whether it is - better real performance => higher taxation; or - shifting profits into CZ => higher taxation => artificially better performance

10 References David Procházka Albu, Nadia, Ioana Lupu, and Raluca Sandu Multinationals as Vectors of Corporate Governance Improvement in Emerging Economies in Eastern Europe: A Case Study. In Corporate Governance in Emerging Markets, edited by Sabri Boubaker and Duc Khuong Nguyen, Berlin, Heidelberg: Springer Berlin Heidelberg. Cui, Anna Shaojie, David A. Griffith, S. Tamer Cavusgil, and Marina Dabic The Influence of Market and Cultural Environmental Factors on Technology Transfer between Foreign MNCs and Local Subsidiaries: A Croatian Illustration. Journal of World Business 41 (2): Delios, Andrew, and Paul W. Beamish Survival and Profitability: The Roles of Experience and Intangible Assets in Foreign Subsidiary Performance. Academy of Management Journal 44 (5): doi: / Demsetz, Harold, and Belén Villalonga Ownership Structure and Corporate Performance. Journal of Corporate Finance 7 (3): doi: /s (01) Ernest, Jan Český Průmysl Je náš Jen Z Poloviny (Only Half of the Czech Industry Is Ours"). Statistika&My 4 (10): Fang, Yulin, Guo-Liang Frank Jiang, Shige Makino, and Paul W. Beamish Multinational Firm Knowledge, Use of Expatriates, and Foreign Subsidiary Performance. Journal of Management Studies 47 (1): doi: /j x. Fang, Yulin, Michael Wade, Andrew Delios, and Paul W. Beamish International Diversification, Subsidiary Performance, and the Mobility of Knowledge Resources. Strategic Management Journal 28 (10): doi: /smj.619. Fey, Carl F., and Ingmar Björkman The Effect of Human Resource Management Practices on MNC

11 Subsidiary Performance in Russia. Journal of International Business Studies 32 (1): doi: /palgrave.jibs Gaur, A. S., A. Delios, and K. Singh Institutional Environments, Staffing Strategies, and Subsidiary Performance. Journal of Management 33 (4): doi: / Kostova, Tatiana, and Kendall Roth Adoption of an Organizational Practice by Subsidiaries of Multinational Corporations: Institutional and Relational Effects. Academy of Management Journal 45 (1): doi: / Luo, Yadong Market-Seeking MNEs in an Emerging Market: How Parent Subsidiary Links Shape Overseas Success. Journal of International Business Studies 34 (3): doi: /palgrave.jibs Oliver, Christine Strategic Responses to Institutional Processes. Academy of Management Review 16 (1): doi: /amr Thomsen, Steen, and Torben Pedersen Ownership Structure and Economic Performance in the Largest European Companies. Strategic Management Journal 21 (6): doi: /(sici) (200006)21:6<689::aid-smj115>3.0.co;2-y. Yang, Qin, Ram Mudambi, and Klaus E. Meyer Conventional and Reverse Knowledge Flows in Multinational Corporations. Journal of Management 34 (5): doi: /

12 David Procházka Department of Financial Accounting and Auditing Faculty of Finance and Accounting University of Economics, Prague W. Churchill Sq. 4 Prague, Czech Republic Web: <prochazd@vse.cz>

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