Thin Capitalization Strategy Of Tax Avoidance, Bankruptcy Risks And Corporate Ownership Structure Of Listed Agricultural Companies In Nigeria
George Tamunotonye Peters
Department of Accountancy, Faculty of Management Sciences, Rivers State University, Port Harcourt, Nigeria
Okiakpe Ebikefe Kenneth
Department of Accountancy, Faculty of Management Sciences, Rivers State University, Port Harcourt, Nigeria
Eyitayo Adeyemi
Department of Accountancy, Faculty of Management Sciences, Rivers State University, Port Harcourt, Nigeria.
Keywords: Thin Capital, Tax Avoidance, Bankruptcy Risk, Corporate Ownership, Nigeria
Abstract
The moderating role of ownership structure is often ignored in associating thin capitalization strategy of tax avoidance with bankruptcy risk, thereby discouraging business firms from exploiting it. Against this backdrop, this study was undertaken to examine the moderating impact of ownership structure on the relationship between thin capitalization and bankruptcy risk. The population of the study is quoted agro-allied companies in Nigeria. Secondary data were collected from published annual financial statements of the population members using purposive sampling method over the periods 2013 to 2020. Thin capitalization was measured in terms of ratio of non-current liabilities to total shareholders’ funds; corporate ownership structure was operationalized in terms of ownership concentration, while bankruptcy risk was measured in terms of probability function of Altman’ Z-score. Pooled multiple regression technique was utilized for the analysis based on 5% level of significance. Following analysis, it was found that thin capitalization was significantly and positively related with bankruptcy risk thus confirming the anxiety over risk. But it was also found that below certain degree of ownership concentration, a significant negative relationship is possible between thin capitalization and bankruptcy risk. It was therefore concluded that thin capitalization strategy of tax avoidance can also be exploited without the risk of bankruptcy, though the strategy is not advantageous in every environment of ownership structure. In line with the conclusion reached, it is the recommendation of this study that firm managers should balance risk and return in seeking to exploit thin capitalization strategy of tax avoidance as the use of debt financing increases their firms’ bankruptcy risk. Furthermore, firm managers should be sensitive to their peculiar shareholding structure in seeking to exploit thin capitalization strategy of tax avoidance.