Ownership structure, audit quality and tax avoidance among listed firms in Kenya

Abstract

Taxes contribute significantly to the growth of an economy. However, the burden of paying taxes is costly to the taxpayers. In this regard, taxpayers tend to exploit any existing opportunity to reduce their tax liability. Tax avoidance is one of the tool that taxpayers use to reduce taxable income without contravening the existing tax laws. Essentially, tax avoidance means less tax liability and more dividends to the shareholders. Though prior studies suggest a significant relationship between ownership structure and tax avoidance among firms, their findings are inconclusive. Corporate governance literature show that the audit quality helps in detection and prevention of unethical practices such as earnings manipulation and aggressive tax planning. However, there is a gap in literature on how audit quality influences the relationship between ownership structure and tax avoidance. Therefore, the general objective of this study was to determine whether audit quality moderates the link between ownership structure and tax avoidance. The specific objectives of study were to establish the effect of; managerial, institutional, foreign and government ownership on tax avoidance. Additionally, the study examined the moderating effect of audit quality on the relationship between; managerial, institutional, foreign, government and tax avoidance. The study was grounded on the agency theory. The study was premised on descriptive, longitudinal and explanatory research design. The study’s population comprised of the 67 listed firms at the NSE and after applying the inclusion/exclusion criteria only 49 firms were considered for further analysis. Data was extracted from the selected firms’ annual reports over the period 2011 to 2020 and was analyzed through descriptive and inferential statistics. The hypotheses were tested through hierarchical multiple regression models and the choice between the fixed and random effect was based on the results of the Hausman test. The findings of the study show a negative and significantly association between managerial ownership (β = -0.123 ρ<0.05), government ownership (β = -0.210, ρ< 0.05), institutional ownership (β= -0.117, ρ <0.05) and tax avoidance. The results further show a positive and significant association between foreign ownership (β= 0.261; ρ <0.05) and tax avoidance. The moderation results indicate that a negative and significant moderating effect of audit quality on the relationship between managerial ownership (β = -0.199, ρ< 0.05), government ownership (β = -0.189, ρ< 0.05), institutional ownership (β = -0.070, ρ< 0.05) and tax avoidance. However, audit quality has positive and significant moderating effect on the relationship between foreign ownership and tax avoidance (β = 0.197, ρ< 0.05). From the findings, the study concluded that listed firms with high managerial ownership, government ownership and institutional ownership are less likely to engage in tax avoidance. Inversely, firms with a large proportion of foreign ownership have a high propensity of engaging in tax planning. The study further concluded that the negative effect of managerial ownership, and institutional ownership on tax avoidance is more pronounced in an environment of high quality of audit Based on the findings, the study recommend policy measure on ownership threshold among listed firms, fundamental foreign ownership that positively associated with tax avoidance. Future studies may consider private firms and other jurisdictions since this may shed more light on the relationship between ownership structure, audit quality and tax avoidance.