Effect of Transfer Pricing on Financial Performance of Multinational Firms Listed at the Nairobi Securities Exchange

Abstract

The relationship between transfer pricing and financial performance is intricate and significant for multinational corporations. Properly executed transfer pricing can have a profound impact on a company's financial performance. This study investigated the effect of transfer pricing on the financial performance of multinational firms listed at the Nairobi Securities Exchange (NSE) in Kenya. Grounded in agency theory, transaction cost economics, and signaling theory, the research aims to discern the relationships between transfer pricing, control variables (capital structure, liquidity, and firm size), and the dependent variable (financial performance- ROA). The methodology employed was descriptive and utilized secondary data extracted from the annual financial disclosures of 19 multinational enterprises listed on the NSE, spanning the period from 2018 to 2022. This comprised 95 observations. Data collection involved extracting relevant financial metrics, including ROA, transfer pricing, capital structure, firm liquidity, and firm size, from publicly available financial statements. Descriptive, correlation, and regression analyses were employed to unravel patterns and relationships within the dataset. The correlation analysis reveals significant positive relationships between ROA and transfer pricing, firm liquidity, and firm size. The regression model, with transfer pricing, firm liquidity, and firm size as predictors, yields an R-squared value of 0.607, indicating that approximately 60.7% of the variation in ROA is explained by these variables. The regression coefficients indicate a robust positive association between transfer pricing and ROA, signifying that higher levels of related party transactions are associated with improved financial performance. Firm liquidity and firm size also exhibit positive relationships with ROA. The study concludes that transfer pricing significantly influences the financial performance of multinational firms at the NSE in Kenya. Larger enterprises and those with higher liquidity levels tend to exhibit better financial performance. However, capital structure does not emerge as a significant factor in this context. The study recommends enhanced transfer pricing regulations, strategic decision-making regarding liquidity and firm size, and a nuanced consideration of capital structure. The study suggests avenues for further research, including qualitative investigations into transfer pricing decision-making processes, comparative analyses across diverse geographical contexts, exploration of the impact of evolving international tax regulations, and examinations of the role of technology in shaping transfer pricing strategies.