Corporate foreignness and earnings retention practices in Africa
Abel Ebeh Ezeoha, Obiajulu Chibuzo OkekePurpose
This study aims to examine the earnings retention practices of incorporated firms on Africa’s major stock exchanges. It hypothesizes that foreign and regional multinationals in Africa maintain different internalization processes and earnings retention policies than local firms.
Design/methodology/approach
The data collection unit comprises a panel dataset of 261 companies listed on 13 stock exchanges in Africa. The choice of firms and number of years were based on data availability. A system dynamics generalized method of moment estimation model was used.
Findings
Emerging evidence indicates that the impact of internal firm characteristics on earnings retention varies between foreign and domestic firms. For example, foreign firms in the mineral resource sector are less likely to maintain an active retention policy than their local counterparts. Foreign firms with more investments in fixed assets have a lower probability of earnings retention than local firms. An increase in firm size can increase or decrease retained earnings for both foreign and local firms.
Practical implications
The foregoing results call for policy and capital control emphasis to be shifted to deal with how firms (foreign and local) manage their internal capital market operations. Corporate tax policy remains a functional mechanism for moderating the negative impact of taxes on corporate earnings retention behaviour.
Originality/value
This study is original in that it shifts the focus from the predominant analysis of the internalization theory based on soft capabilities (knowledge, research and development) to firms’ attempts to deploy their internal capital markets as a means of strategic intra-firm capital allocation.