Effect of financial performance on corporate taxes among firms listed at the Nairobi securities exchange

Abstract

This study sought to determine the effect of financial performance on corporate taxes among firms listed at the NSE. The population for the study was all the 65 companies listed at NSE as at 31 st December 2018. Data was obtained from 56 firms that were consistently listed for the five years (2014 to 2018) giving the researcher 280 data points. The independent variables for the study were profitability as measured by return on equity, firm value as measured by market value of equity to book value of equity and firm efficiency as measured by the ratio of total revenue to total assets whereas corporate taxes as measured by effective tax rate was the dependent variable. The study used secondary data that was collected over the period of study of five year (2014-2018) on annual basis. The research design was cross sectional design while the data was analyzed using multiple linear regression so as to find out the association amongst the variables. Stata version 13 was used for data analysis purposes. The study found that profitability (β=0.032, p=0.029), firm value (β=0.095, p=0.000) and firm efficiency (β=0.082, p=0.001) had a positive and significant relationship with corporate taxes among NSE listed firms. The results also indicated R 2 of 0.1468 which implied that profitability, firm value and firm efficiency contributed 14.68% to variations in corporate taxes. It was shown by the ANOVA outcomes that the F statistic is significant at 5 % significance level with P=0.000. It was therefore appropriate to use this model in explaining the relationship. Further the results exhibited that all the independent variable profitability, firm value and firm efficiency produced positive and statistically significant values for this study. The study recommends government through the policy makers should create a conducive environment for the firms listed at the NSE which translates to more profitability leading to more corporate taxes and consequently triggering economic growth. Firms should also seek ways of increasing their assets base which would translate to more corporate taxes and consequently leading to a better environment. The study further recommends the need for listed firms to hire managers that are dedicated and competent enough to enhance firm efficiency and firm value as these two were also found to enhance the level of corporate taxes. To achieve this, firms might have to incur agency costs with an aim of aligning the goals of managers with those of shareholders.