Liquidity Constraints and Tax Liability Targeting of Banks in Ghana: Analysis of Persistence and Distance to Target

Abstract

Abstract This paper examines the effect of liquidity constraints on tax liability targeting among banks in Ghana, with emphasis on the persistence and speed of adjustment toward tax targets. While liquidityconstrained banks are expected to engage in aggressive tax planning to generate cash savings, empirical evidence on the dynamic adjustment process remains limited. Using monthly data converted from audited annual reports for 2008–2022 via the Denton procedure, the study applies dynamic ordinary least squares, impulse response functions, delay, and half-life analyses. The results reveal significant heterogeneity across liquidity-constraint regimes, with higher persistence and faster adjustment under constrained conditions. Tax liability targeting adjusts most rapidly when deposit growth is constrained and slowest under loan–deposit constraints. Overall, the study contributes to the tax planning literature by demonstrating that banks’ tax behaviour is intrinsically dynamic and conditioned by liquidity-constraint transitions, highlighting the importance of policies that mitigate liquidity stress to limit aggressive tax practices.