Abstract
This study focuses on a transfer pricing taxation (TPT) action as one of corporate governance issues. TPT is a tool for preventing the manipulation of transfer pricing. We investigate which factors affect corporate valuation, using a sample of Japanese companies to which TPT was unintentionally applied. With this regard, we put emphasis on the role of corporate governance for the preparation against a risk event. In addition, we attempt to determine what kinds of corporate governance structure are most likely to prepare for an unexpected TPT inspection. As a result of our examination, we find that the association of the directors’ shareholding ratio (DIR) with the cumulative abnormal rate of return (CAR) is statistically significant. We also find that this relation has both a hump and a negative hump, which implies that it is a cubic function. Based on these results, we conclude that a DIR of about 5% is the optimum ratio for a firm facing an emergency situation, and this shows some implications about what kinds of corporate governance structure.
Highlights
While we have seen some governance issues arising from the separation of ownership and control in previous papers, it is not surprising that the form and structure between the performance of firms and managerial ownership has been the subject of empirical research
We find that the association of the directors‟ shareholding ratio (DIR) with the http://abr.julypress.com
Shuto (2010) uses Japanese data to investigate the relation between managerial ownership and discretionary earnings management in Japanese firms, and this study investigate the nonlinear relation between managerial ownership and discretionary earnings management by managers, with reference to Morck et al (1988)
Summary
While we have seen some governance issues arising from the separation of ownership and control in previous papers, it is not surprising that the form and structure between the performance of firms and managerial ownership has been the subject of empirical research (for example, see Morck, Shleifer, and Vishny, 1988; McConnell and Servaes, 1990, 1995; Kole, 1995). Tax authorities frequently encounter difficulties when auditing internal transfer prices, because MNFs have a strong incentive for tax evasion, manipulating transfer prices to retain as much profit as possible in a division located in a low-tax jurisdiction To cope with this problem, tax authorities in countries within the Organization for Economic Co-operation and Development (OECD) are supposed to audit multinational transfer prices to determine whether they meet the arm’s length standard: the transfer price is equal to the price at which two independent firms would trade (here, independent means that they are not controlled by the same MNF). Kim and Lu (2011) investigate the effects of the interaction between managerial ownership and risk-taking attitudes, such as the effects on research and development (R&D) activities In most of these previous studies, the typical dependent variable measuring corporate performance was the return on equity (ROE), return on assets (ROA), or Tobin‟s Q (e.g., Hu and Izumida 2008); in this study, we take CAR as the dependent variable.
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