The effect of tax planning and earnings management on firm performance with moderated role of audit quality and dividend policy: Evidence from east African listed companies

Heri, Gasper Mulamula (2023) The effect of tax planning and earnings management on firm performance with moderated role of audit quality and dividend policy: Evidence from east African listed companies. PhD thesis, UTAR.

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Abstract

This study examines the effect of earnings management and tax planning on a firm's performance with the moderated role of auditing and dividend policy on manipulative practices in East Africa. The study uses panel data of non-financial listed firms in East African countries over the period of eleven years from 2009 to 2019. Most importantly, the study has integrated both agency and signalling theories to examine the relationship between manipulative practices and firm performance. To avoid measurement errors and inconsistent results in conformist tax planning and earnings management measures, the study has utilized the modified Jones model (1995), the most widely accepted model for measuring accrual-based earnings management. Accordingly, the study has measured real earnings management by following the Roychowdhury model. Also, the study has measured tax planning by using disaggregated book-tax differences, while a firm's performance will be measured using Tobin Q and Return on Asset (ROA). Audit quality has been measured using the natural logarithm of audit fees, and the pay-out ratio has measured dividend policy. In addition, the study has performed a robustness check by using alternative measures of tax planning, audit quality and dividend policy. Using the Generalized Method of ii Moments (GMM) estimator as the main model, the study finding reveals a significant relationship between tax planning, earnings management, and firm performance. Also, the finding indicates the negative moderated effect of dividend policy on the relationship between tax planning, earnings management, and firm performance. However, the results reveal no evidence that auditing quality significantly moderated the relationship between tax planning, earnings management, and firm value. Therefore, the study finding suggests that East African listed firms engage in manipulative practice to benefit managers' self-interest and reduce firm performance. Also, the impact of manipulative practices on firm performance is moderated by dividend policy. However, there is no moderated impact on Audit Quality. The study has theoretical, practical and policy implications regarding anti-tax avoidance measures and effective utilization of tax and financial regulations to wide range of stakeholders including shareholders, authorities and scholars in all EAC partner states.

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