The Effects of Corporate Tax Planning on Firm Value for Companies Listed at the Nairobi Securities Exchange

Abstract

Many studies suggest that the financial directors of most quoted firms consider the reduction of their firm‟s effective tax rate as the main objective of their tax department. Apparently, these firms believe that reducing the effective tax rate creates value for their shareholders. Recent interviews with investors and financial analysts, however, suggest they pay little attention to after tax earnings when valuing a firm. These investors and analysts do not believe that a company can sustainably outperform the firm‟s statutory tax rate. They also think that tax information in the public accounts is so unclear that it is unusable for their valuations. Given this background, the study sought to examine the effect of corporate tax planning on the value of firms listed at the Nairobi Securities Exchange. This study was designed as a causal predictive research design. Given that the purpose of this study was to examine the effect of tax avoidance on financial performance, this was the most appropriate design for the study. The population of this study was all the companies listed on the Nairobi Securities Exchange. Secondary data was sourced from the CMA, respective company websites, and The African Financials website on the variables of interest for the five year period beginning 2009 to 2013 for 20 companies with complete data. A descriptive analysis was used to describe the data in terms of mean scores and standard deviations among other descriptive statistics. In order to examine the effect of tax planning on firm value, regression analysis was carried out. Since the data collected was panel data, the analysis was performed using panel data regression techniques with the aid of Eviews 7 analysis software. The descriptive results showed that the mean firm value was 0.4551 while effective tax rates averaged 23%. The major finding was that tax planning had a negative and significant impact on the value of the firm (β = -0.05, p = 0.04). The study also showed that board ownership had a positive but insignificant effect on firm value (β = 0.0006, p = 0.547). The results further showed that age of the firm had a negative a negative and significant effect on firm value (β = -0.01, p = 0.001). The study found that size of the firm had a positive and significant effect on firm value (β = 0.002, p = 0.000). The study revealed that leverage had a negative and significant effect on firm value (β = 0.585, p = 0.002). The results further showed a negative but insignificant relationship between asset tangibility and firm value (β = -0.01, p = 0.542). The results showed that the F-statistic was 41.16 and significant, p < .001, thus suggesting that the model was fit to explain the relationship between tax planning and firm value. From the R2 value, the model explained 95.7% of the variance in firm value. The study concludes that tax planning influences the value of listed firms in Kenya. The study recommends the need for firms to institute more robust tax planning practices that will help reduce their effective tax liabilities and therefore improve their overall value. Firms that engage in better tax planning practices are likely to get higher firm value