The impact of tax planning and corporate governance on firms’ value in East Africa.

Abstract

The study investigated the impact of tax planning on the value of listed firms in East African countries (EACs). Further, it examined the moderating influence of corporate governance on the relationship between tax planning and firm value. The data collected involved 99 firms listed on the capital markets of three EACs: Tanzania, Kenya and Uganda. The study used unbalanced panel data reflecting twelve years from 2008 to 2019. The research had four separate objectives. Regarding the first objective, the empirical findings revealed the existence of tax planning activities amongst the firms listed in EACs. The results showed a gradual increase in the tax planning activities in EACs during the twelve years represented. The study’s findings concerning the second objective showed that firm size, profitability, and age significantly influenced the level of tax planning in EACs. Moreover, these results suggested that large, more profitable, and older firms were less tax aggressive. Regarding corporate governance mechanisms, the findings were that large board size, an increase in directors’ compensations and ownership concentration increased the tax planning aggressiveness of the firms. The results further demonstrated that specific institutional arrangements in a country, such as management quality, culture, regulations, ethics and auditing quality, significantly impacted the firms' tax planning activities. Regarding the third objective, the findings showed that tax planning negatively impacted firm value. Lastly, concerning the fourth objective, the results established that the strength of corporate governance had a significant moderating influence on the relationship between tax planning and firm value. The study concludes that firms that engage in better tax planning practices can generate higher firm value when good corporate governance systems are in place. The researcher recommends higher transparency in firms’ tax-planning activities because they can potentially increase a firm's value. The study contributes to knowledge since there is a general dearth of published research studies that estimate the associations between tax planning, corporate governance and firm value in emerging economies. This thesis makes several recommendations from the study concerning tax planning activities to guide governments, managers, practitioners and shareholders of firms in emerging economies.