Effect of Capital Deductions on the Financial Performance of Listed Companies at the Nairobi Securities Exchange in Kenya

Abstract

Purpose: Shareholders’ wealth maximization is a priority objective of every corporate entity. The issue of corporate tax planning and firm value is gaining relevance following the recent financial crises which resulted in the increasing collapse of global and local companies. The purpose of this study was to investigate the effect of capital deductions on the financial performance of companies listed at the Nairobi Securities Exchange (NSE) in Kenya. The study was anchored on signaling theory. Methodology: The study adopted both explanatory and longitudinal research. Secondary data for the study for the period between 2013-2022 was extracted from annual financial statements of 57 listed firms targeted for analysis. The data for the study was analyzed through descriptive and inferential statistics using statistical techniques including Pearson correlation coefficient and regression analysis. All the analyses were done using the STATA version 13.0 Pearson correlation results revealed a significant association between study variables and financial performance. Multiple Linear regression model was used to analyze relationships and the effect of the study variables. Results: The study findings established that capital deductions (β = 0.844, p-value = 0.000, <0.05) have a positive and significant effect on financial performance. The study contributes to knowledge by revealing new insights that tax planning has a significant effect on financial performance of listed firms in Kenya. Specifically, it was established that capital deductions have a significant effect on financial performance of listed firms. Conclusion: The study concludes that a holistic approach to tax planning and an optimal mix of tax planning strategies are important determinants and have a positive contributory effect on firm performance. The study recommends that companies’ management should strive to have an in-depth understanding of tax laws to take advantage of every opportunity that will reduce their tax liability thereby increasing their returns and value. The future researchers should explore the effect of Indirect tax incentives on financial performance.