Corporate transparency, cash holding, and Tax avoidance among firms listed at the Nairobi securities exchange, Kenya

Abstract

Revenue authorities globally have shown keen interest in listed firms due to increased cases of tax avoidance. Although this phenomenon has been a subject of discussion, extant literature indicates that the effect of corporate transparency on tax avoidance has been very controversial. The general objective of the study was to investigate corporate transparency, cash holding and tax avoidance among firms listed in the Nairobi securities Exchange, Kenya. The specific objectives of the study were: to examine the effects of corporate transparency; financial transparency, governance transparency, social transparency, and operational transparency on tax avoidance. Additionally, the study examined the moderating effect of cash holding on the relationship between financial transparency, governance transparency, social transparency, operational transparency, and tax avoidance. The study was guided by the Agency theory, Tax avoidance theory, and Stakeholders theory. The study adopted longitudinal and explanatory research designs and used panel data to establish causal relationships between the research variables. The target population is comprised of 67 listed firms in the NSE. The inclusion/ exclusion criterion was based on whether the firms traded consistently during the study period or operated under different compliance and regulatory environments. The study used a sample of 31 firms that met the inclusion criteria. Data was extracted from the individual firm’s audited annual reports for the period 2009 - 2018. The generated data were analyzed using descriptive and inferential statistics. The results of the Hausman test pointed to fixed-effect regression. The study found that financial transparency (β=-0.698, ρ<0.05), governance transparency (β=-0.489, ρ<0.05), and operational transparency (β=-0.611, ρ<0.05), had a negative and significant effect on tax avoidance while social transparency (β=0.525, ρ<0.05) had a positive and significant effect on tax avoidance for firms listed at the Nairobi Securities Exchange. Moreover, the study further established that cash holding had a positive and significant effect on tax avoidance (β=0.121, ρ<0.05). The study further tested the moderating role of cash holding and found that cash holding moderated the relationship between financial transparency (β=0.267, ρ<0.05, R2 change 0.017), governance transparency (β=-0.167,ρ<0.05 R2 change, 0.018), social transparency (β=0.099, ρ<0.05, R2 change 0.009), operational transparency (β=-0.136, ρ<0.05 R2 change 0.009), and tax avoidance within the context of firms listed at the Nairobi Securities Exchange, Kenya. Based on the results, the study concluded that corporate transparency is a significant determinant of tax avoidance, and the study concluded that cash holding moderates the relationship between corporate transparencies on tax avoidance among the firms listed at the Nairobi Securities Exchange. This makes a novel contribution to the existing literature on cash holding. The study recommends that the policymakers and the top management organs of the Kenyan firms should embrace corporate transparency and maintain an optimal level of liquidity. The regulator should ensure that corporate disclosures are stepped up and some voluntary disclosures are made mandatory as this will reduce the tax avoidance practices.