Effects of Thin Capitalization on The Financial Performance of Multinational Companies in Nigeria

Document Type : Original Article

Authors

1 Department of Accounting, Lagos State University, Lagos, Nigeria

2 Department of Accounting. Lagos State University, Lagos, Nigeria

Abstract

Before the Finance Act 2019, multinationals exploited the absence of thin capitalization rule in Nigeria, resulting in the government's loss of tax revenue. Thereby necessitating the examination of the effects of thin capitalization on the financial performance of multinational firms in Nigeria. Secondary data was obtained from the annual reports of eight selected multinationals from 2014 to 2021. Thin capitalization was a proxy with financial leverage ratio, fixed-charge coverage ratio and debt ratio; financial performance was a proxy with return on asset, while the firm’s size was used as a control variable. Data were analyzed using descriptive statistics, cross-sectional dependence tests, serial correlation, normality tests and regression analyses. The findings revealed that financial leverage and debt ratio do not significantly affect ROA, while fixed-charge coverage ratio had an effect on ROA. The study, therefore, concluded that thin capitalization does not affect multinationals in Nigeria. Hence, Federal inland revenue was recommended to ensure that all multinationals comply with the Finance Act 2019 on the restriction of interest deductible from profit.

Keywords

Main Subjects

©2023 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0).

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