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The influence of governance infrastructure and corporate governance on profit shifting

Author

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  • Anish Sugathan

    (Indian Institute of Management Ahmedabad, Ahmedabad, India
    Harvard Kennedy School of Government, Harvard University, Cambridge, USA)

  • Rejie George

    (Indian Institute of Management Bangalore, Corporate Strategy and Policy Area, Bangalore, India)

Abstract

In this article we develop a conceptual model to examine the influence of quality of country-level governance infrastructure and corporate governance effectiveness on profit shifting. We empirically test propositions derived from the model with a unique firm-level data set and using multiple indicators of governance infrastructure quality and corporate governance mechanisms. We estimate that on average about 6% of total pre-tax income is shifted out of foreign-owned firms in India. We show that governance infrastructure that improves collective action and transparency in both the foreign- and host-country reduces shifting. On the other hand, secure property rights and efficient contracting in the foreign country increases shifting. We also find that monitoring by foreign institutional investors restricts shifting.

Suggested Citation

  • Anish Sugathan & Rejie George, 2015. "The influence of governance infrastructure and corporate governance on profit shifting," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 46(8), pages 886-916, October.
    • Handle: RePEc:pal:jintbs:v:46:y:2015:i:8:p:886-916
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    Cited by:

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    3. Chang Liu & Chune Young Chung & Hong Kee Sul & Kainan Wang, 2018. "Does hometown advantage matter? The case of institutional blockholder monitoring on earnings management in Korea," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(2), pages 196-221, February.
    4. Ruth V. Aguilera & Kurt A. Desender & Mónica López-Puertas Lamy & Jun Ho Lee, 2017. "The governance impact of a changing investor landscape," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(2), pages 195-221, February.
    5. Gnekpe, Christian & Jimenez, Alfredo, 2023. "Smoke signal: When firms' patent strategy and local patent protection system affect equity stakes in cross-border acquisitions," Journal of International Management, Elsevier, vol. 29(6).
    6. Sara L. McGaughey & Pascalis Raimondos & Lisbeth La Cour, 2018. "What is a Foreign Firm? Implications for Productivity Spillovers," CESifo Working Paper Series 7109, CESifo.
    7. Herita Akamah & Ole-Kristian Hope & Wayne B Thomas, 2018. "Tax havens and disclosure aggregation," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(1), pages 49-69, January.
    8. Mukherjee, Debmalya & Kumar, Satish & Mukherjee, Deepraj & Goyal, Kirti, 2022. "Mapping five decades of international business and management research on India: A bibliometric analysis and future directions," Journal of Business Research, Elsevier, vol. 145(C), pages 864-891.
    9. Ruth V. Aguilera & Valentina Marano & Ilir Haxhi, 2019. "International corporate governance: A review and opportunities for future research," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(4), pages 457-498, June.
    10. Khanindra Ch. Das, 2022. "Profit-shifting behaviour of emerging multinationals from India," WIDER Working Paper Series wp-2022-21, World Institute for Development Economic Research (UNU-WIDER).
    11. Heather Berry, 2017. "Managing valuable knowledge in weak IP protection countries," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(7), pages 787-807, September.
    12. Kant, Chander, 2018. "Financial openness & institutions in developing countries," Research in International Business and Finance, Elsevier, vol. 46(C), pages 240-250.
    13. Attig, Najah & Chen, Ruiyuan & El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck & Pittman, Jeffrey, 2020. "Are insiders equal? Evidence from earnings management in closely held East Asian firms," Research in International Business and Finance, Elsevier, vol. 54(C).
    14. Manthos D. Delis & Iftekhar Hasan & Panagiotis I. Karavitis, 2020. "Profit shifting and tax‐rate uncertainty," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(5-6), pages 645-676, May.
    15. Nouf Binhadab & Robert Gillanders & Thomas McCluskey, 2023. "A clean and discreet service: The role of corruption and secrecy in profit shifting by multinational firms," Journal of International Development, John Wiley & Sons, Ltd., vol. 35(7), pages 1551-1573, October.
    16. Eulaiwi, Baban & Khalaf, Nihad Shareef & Al-Hadi, Ahmed & Duong, Lien & Taylor, Grantley, 2024. "Money laundering governance and income shifting: Evidence from Australian financial institutions," Economic Modelling, Elsevier, vol. 132(C).
    17. Delis, Fotios & Economidou, Claire & Hasan, Iftekhar, 2022. "Democracy, Institutions, and International Profit-Shifting," MPRA Paper 111715, University Library of Munich, Germany.
    18. Xu, Kai & Hitt, Michael A. & Brock, David & Pisano, Vincenzo & Huang, Lulu S.R., 2021. "Country institutional environments and international strategy: A review and analysis of the research," Journal of International Management, Elsevier, vol. 27(1).
    19. Aleksi Eerola & Arjen H. L. Slangen, 2022. "A Review of International Management Research on Corporate Taxation," Management International Review, Springer, vol. 62(5), pages 643-680, October.
    20. Khadija Straaten & Niccolò Pisani & Ans Kolk, 2020. "Unraveling the MNE wage premium," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 51(9), pages 1355-1390, December.
    21. Muhammad Farooq Ahmad & Nihat Aktas & Douglas Cumming & Guosong Xu, 2024. "Board reforms and M&A performance: international evidence," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 55(5), pages 616-637, July.

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