Examining the effects of global challenges on business
Dr Justin Nguyen’s research seeks to examine the effects of global challenges such as climate change and political uncertainty on business and government.
Business is an important function of every society and is the main source of technology, innovation, job and wealth creation, and economic development. It’s these reasons which lead Dr Justin Nguyen, a Lecturer in Accounting at the Wellington School of Business and Government, to pursue research that seeks to inform business managers and shareholders to improve their decisions and supports government by showing the impacts of government regulations and policies.
In a recent paper published in Journal of Corporate Finance, titled “Carbon risk and corporate capital structure”, Dr Nguyen, along with co-author Associate Professor Hieu V Phan from the University of Massachusetts Lowell, examine Australia’s ratification of the Kyoto Protocol to assess the impact it had on heavy carbon emitting companies. They found that heavy carbon emitters decreased their financial leverage (the use of debt to increase returns from an investment or project) and were at greater risk of not being able to meet their financial obligations.
“The transition from a fossil fuel-based to a lower-carbon economy is rapid and inevitable to deal with the global issue of climate change,” says Dr Nguyen. “But this process increases risk for firms operating in carbon-intensive industries such as energy, materials, or utilities, which are still the major economic drivers of many economies—including Australia. Hence, the question on how carbon risk is financially affecting these heavy carbon emitters is of great interests to policy makers as well as business leaders.
“The significance of our findings in this study is three-fold,” says Dr Nguyen. “First, to the best of our knowledge, our study is the first that establishes a direct relation between carbon risk and firm capital structure. Second, we add to a growing stream of literature that examines the economic consequences of climate change risks. Our study is different in that we focus on the risks arising from changes in environmental regulations rather than the effects of changes in climate itself. Third, our finding provides implications for policy makers who are still facing a debate on whether they should increase the stringency of carbon control measures.”
In another recent publication at European Accounting Review, titled “Tax Avoidance and Financial Statement Readability”, Dr Nguyen examined the financial statements of firms based in the United States from 1994-2015 to determine whether firms that engage in high levels of tax avoidance tend to produce financial statements that are difficult to read—ultimately finding this to be true.
“I was surprised by the opposite results between the two groups of tax avoiders,” says Dr Nguyen. “While the low tax avoiders increase their financial statement readability (presumably utilising benign favourable tax treatments so that the benefit of opacity is lower than the cost), the high tax avoiders decrease their financial statement readability (presumably utilising more risky strategies so that the benefit of opacity is higher than the cost).”
The results of this study have implications for both investors and regulators, two of the most frequent users of financial statements.
“For example, investors may face an inherent trade-off when investing in a high tax avoiding firm— between the benefit of high after-tax profit as a result of more aggressive tax avoidance and the cost of high information risk associated with harder-to-read financial statements,” says Dr Nguyen. “Tax authorities may also need to allocate more resources to comprehending public financial statements, especially low readable ones, in addition to private sources of information in their law enforcement process.”
Currently, Dr Nguyen is continuing to research the effects of global challenges such as climate change, political uncertainty, or human capital risk on corporate financial policies and governance practices.
