Effect of Corporate Governance Attributes on Effective Tax Rate Among Firms Listed at the Nairobi Securities Exchange

Abstract

Corporate governance attributes have recently become vital in relation to tax matters more than ever before. Goals of some firms is to use corporate governance mechanisms to mitigate recurring losses and thus businesses are tempted to develop methods to reduce their tax commitments by manipulating the tax rate that reconciles tax disclosure items. This research sought to bring out the effect of corporate governance attributes on the effective tax rate among companies listed on NSE, Kenya. The research established the effect of managerial ownership structure, gender diversity and board independence on effective tax rate among NSE listed companies. Financial leverage, liquidity and firm size were used as the control variables in the model. Descriptive research design was utilized. The target population was the firms on Kenya's NSE. There are 63 companies listed at the NSE but only 55 provided complete data set. Research variables data were derived from audited company's annual financial statements from 2016 to 2020 for all 55 companies making 275 observations. Regression and correlation analysis were used to test the study hypotheses by establishing the correlation between corporate governance attributes and effective tax rate. The study found that managerial ownership (β=0.032, p=0.029), gender diversity (β=0.095, p=0.000), board independence (β=0.082, p=0.001) and firm size (β=0.103, p=0.027) had a positive and significant relationship with effective tax rate among NSE listed firms. Leverage has a significant negative effect on effective tax rate (β=-0.033, p=0.008) while liquidity was not statistically significant. The outcomes too indicated R2 of 0.4836 which implied that the selected independent variables contributed 48.36% to variations in effective tax rate. The study recommends the following; that the management of firms listed in NSE should ensure that the managerial ownership structure is well constituted so that this does not limit effective tax rate, that the management of NSE listed firms ought to ensure that there is an appropriate gender diversity to enhance smooth coordination within the board and that listed firms regulators ensure that there is board independence whereby majority of directors should be non-executive directors as this allows them to make appropriate and non-partisan decisions including matters regarding tax disclosure.