Liquidity Constraint and Tax Planning Activity Nexus in the Ghanaian Banking Sector: Simulation Approach

Author(s): Kwakye Boateng, Kwame Bosiako Omane-Antwi PhD and Yaw Ndori Queku PhD


This paper examines liquidity constraints and tax planning activity nexus using a simulation approach within the Ghanaian banking sector. It is asserted that liquidity-constrained banks are likely to improve their liquidity position through tax planning activities and this could their overall tax liability. This study seeks to provide empirical evidence to validate this assertion through hypothetical constraint scenarios. The paper uses the panel quantile regression model to analyze time-varying scenarios to measure liquidity constraint proxies: negative loan growth, negative deposit growth, and negative loan to deposit. The cash effective tax rate is used to measure tax planning activity. The investigation is done by employing annualized data spanning 2008 to 2022 with analysis covering all licensed banks that have been in operation within the study period. The study uses the quantile regression estimation approach with a oneyear lag of liquidity for sensitivity analyses and robustness checks. The study found that banks are likely to embark on aggressive tax planning activities when confronted with liquidity constraint challenges. Censoring liquidity challenges within the banking sector would help reduce tax compliance problems among the banks in Ghana
Keyword(s): Liquidity constraint, tax compliance, liquidity simulation, GMM, banking sector, Ghana.

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