You are on page 1of 13

THE EFFECT OF CORPORATE TAXATION ON FIRM

PERFORMANCE AND EQUITY


(Evidence from Non financial firms)

Introduction
Background of the study
The study of Income Tax ought to be of lots importance because it functions the existing
situation concerning the organisation income based on which tax liabilities through the agency.
Taking a glance the rates of Income Tax implemented in various business networks globally an
aloft pattern is obviously sizeable in all created and in couple of immature countries. In the observe
it's far inspected the impact of Income Tax on company’s profitability and investment (Saeed,
2004).

Taxes are taken into consideration as a primary component within the business enterprise's
money related articulations, it is a critical a part of every company's execution. Right now tax
evaluation is created in the way it's miles a test for the businesses and for his or her sheets and
Audit forums. The cooperation of sheets and evaluation boards of trustees fluctuates by means of
country and association, in that way their odd kingdom taxes methodologies make a few more
unsuitable assumptions with respect to this vital angle. They apprehend the employer dauntlessness
for fee minimization towards impose confirmation. Organizations want to have an affirmation that
the responsibility professionals won't task their evaluation role as it consists of reputational hazard
and punishment as properly (Mehran and Suher, 2009).

Managing complex evaluation tasks for worldwide, multinational companies spotlight


government laws and universal duty laws, actualize the innovative approaches to execute for
lessening worldwide tax collection, deciding the related tax dangers lastly secure organization's
tax positions. The concentration moved from exclusively planning and actualizing charge
structures to limiting worldwide salary charges while precisely representing them and the inside
controls encompassing this procedure, this move has not come simple for the present evaluation
administrators as Most duty officials see the issue as an "tax" issue that must be illuminated by
experienced, exceptionally talented duty experts and Tax Lawyers. In any case, when you inspect
the causal factors somewhat further, you find that it isn't so much an evaluation issue as it is an
"information" issue. To deliver exact, convenient and understandable worldwide wage impose
arrangements and required divulgences, each organization takes its worldwide budgetary
information, forms it as per the majority of its purview's duty principles and reports the results as
per its monetary announcing gauges. In this way, there are three potential regions where the issue
could emerge, information, impose standards and announcing rules and could conquer these issues
through above process (Louis et al., 2001).

Problem Statement
The earnings tax is the policies which has been applied through the government at the
earnings generated from the personal or organisation assets. The corporate profits tax can play a
big function within the state’s economy as this is the supply that could generate the sales. Different
international locations have specific price of profits taxes charging at the firm or person income.
In Pakistan, there are also the regulations of profits tax at the earning. The gift have a look at will
examine the role of company taxes in the firm profitability in non financial companies in Pakistan
Stock Exchange.

Objective
 To understand the role of corporate taxes on firm return on assets
 To check the role of corporate taxes in firm equity.
Literature Review

As per the study of Hines (1993) analyzed the impact of charges area and outside direct
speculation by looking at the between state circulation of ventures with remote interest in US.
Relapse utilized as a part of this examination, the outcomes showed that high tax rate inside the
state harms the nearby speculation; neighborhood speculator's proportion of offers in respect to
outside financial specialists is around 7 to 9 % for each 1 % rate of tax collection.

The study conducted by Rohra et.al, (2009) who examined the connection between taxes
framework factors and certain different factors of area basic leadership. These relations are tried
utilizing the information from money related specialist organizations working particularly in sindh
(Pakistan). The outcomes demonstrate that tax collection trouble (cost of consistence, assurance
of elucidation of tax laws, and exceptions/reasonings) are emphatically worried about the money
related administrations business area choices, or at the end of the day establishments are not
looking generally impose factor but rather they are just attempting to profit the Business openings.

The study conducted by De Mooij A.et.al, (Nov., 2001), demonstrated the effect of
organization the assignment of outside venture. Results of 25 experimental investigations similar
by registering the versatility in the firm tax rate. It is clarify this variety by the distinctions in
attributes of the basic investigations. Efficient contrasts between ponders are found as for the sort
of outside capital information utilized, and the kind of duty rates embraced. Regression is utilized
as a factual system. They found no deliberate contrasts in the responsiveness of financial specialists
from taxes credit nations and tax exception nations.

As per the study of Ahmed, (2004), demonstrates that operator firms abuse finish data
exemplified in arrangements of evaluation the tax strategy. The examination has been identified
with the effect of Tax liabilities on various factors of gross benefit, cost of offers, costs and so on.
An example of 7,306 organizations from the lodgings and eateries area, incorporates 6,594 in
business administrations and 1,484 in transport producing divisions, for the bookkeeping time
frames 1995 to 2000. He discovered ramifications for smaller scale reenactment demonstrating,
money related straightforwardness, and corporate administration.
According to Nnadi, (2008) investigates the effect of taxes on the profit. The investigation
distinguished example of past profits, worry about keeping up an objective capital structure, ebb
and flow level of monetary use, investor requirements for profit salary, legitimate standards and
imperatives; enlightening measurements technique has been utilized as a part of this exploration,
they found a critical relationship amongst's charges and profit and furthermore propose that benefit
is a noteworthy development of profit strategy of the associations.

According to study of Salinger and Lawrence (1981) investigate the impact of Taxes on
singular company's speculation and securities exchange valuation. Information were gathered US
organizations, Q hypothesis of speculation approach is utilized as a part of this paper to break
down impacts of duty changes and the adjustments. Research discoveries in this examination are
an tax changes great impact which varies in various firms.

As per the study conducted by Fazzari et al., (1987) explore market imperfection for
liabilities and equity as a few organizations don't have the entrance to the outside and unfit to
respond as per the adjustments in resource equity or evaluation, the analyst inspect the financing
progressive system in which the inward back has essential money saving advantages over the outer
fund. By utilizing board information of assembling organizations they found that q esteems were
stay high for vast day and age the profit by the organizations, in respect firms. They finish up
venture is considerably more responsive to the income for those gathering of outer back
restrictions.

As per the findings taken from the study of Rajan et.al, (1998) dissected how much income
accessibility and Firm Size effect Capital inside Investment in OECD Countries. In particular,
study intends to look at on a very basic level inside resources (Capital Investment). Little firms
have compelled excess to outside Capital markets. Each one of the associations have been
investigated, paying little personality to quantify in Each Country. The result revelations show that
Firm Size and Cash stream has useful results and uncommonly sensitive association with inward
premiums in each one of the countries. Help more, it has moreover wander have broad affectability
customarily in Largest firm size social affair and little in the tiniest firm size get-together. Since
the explanation behind this investigation is to can't avoid being to find the effect of Tax on firm
on hypothesis and besides to find to what grow Tax and firm assets the wander and make full use
of it with the point of view of making estimation of firms of nine one of a kind divisions in Pakistan.
Thusly, there are obliged composing on relationship of corporate wage charge, firm size and
wander decided for taking a gander at their effect on organizations of non cash related firms. This
examination is maintained by couple of researchers, which suggest that recognizing verification
of powerful wellspring of financing for wander is essential. In addition firm size can construct the
measure of wander yet augment in corporate pay force extent in an industry's specific territory
generally anyway not seldom reveals diminish in theory which may impact the enthusiasm for
various Listed Manufacturing and organization organizations.
Research Methodology

Population

The aim of the current study will be to evaluate the effect of corporate taxes on the firm
performance and equity in Pakistan Stock Exchange. The area of the study will be the non financial
firms listed at Pakistan Stock Exchange. At present there are 399 non financial firms as per the
Balance Sheet Analysis of non financial firms 2010-2015. These 399 firms will be taken as the
population of the study.

Sample Size

The sample is the unit which has been drawn from the population and having the same
features of population. It will be difficult to include all the listed non financial firms in the study.
When the population of the study is homogenous then the study can use the random sampling
technique (Ahmed, 2004). By random sampling technique, the study will take 100 non financial
firms as the sample of the study. The study will collected the non financial firms from 2010 to
2016.

K = N/n

= 397/100 4 (every 4th firm will be included in the study)

Data Collection

The variables of the current study needs the data to be collected from the published reports
i.e. the income statement and balance sheet of the firm. The variables are quantitative in nature
and their information can be downloaded from the annual reports of the firm or from the report of
State Bank of Pakistan i.e. Balance sheet analysis of non financial firm. The data of the non
financial firms will be collected from 2010 to 2016.
Data Analysis
The current study is based on the secondary data and in Pakistan Stock Exchange. The
nature of the study is both time series and cross sectional in nature which makes it panel data. The
data of the variables will be collected from the sources, then it is will imported to MS Excel and
then the Excel sheet will be imported to Stata v 12. Then the recommend models will be run on
the data.

Hypotheses

H0: Corporate tax rate has negative effect on ROA

H1: Corporate tax rate has positive effect on ROA

H0: Firm leverage rate has negative effect on ROA

H1.2: Firm leverage rate has positive effect on ROA

H0: Firm size rate has negative effect on ROA

H1.3: Firm size rate has positive effect on ROA

H0: Firm growth has negative effect on ROA

H1.4: Firm growth has positive effect on ROA

H0: Firm dividend payout has negative effect on ROA

H1.5: Firm dividend payout has positive effect on ROA

H0: Corporate tax rate has negative effect on the firm equity

H2: Corporate tax rate has positive effect on the firm equity

H0: Firm leverage rate has negative effect on the firm equity

H2.1: Firm leverage rate has positive effect on the firm equity

H0: Firm size rate has negative effect on the firm equity

H2.2: Firm size rate has positive effect on the firm equity

H0: Firm growth has negative effect on the firm equity


H2.3: Firm growth has positive effect on the firm equity

H0: Firm dividend payout has negative effect on the firm equity

H2.4: Firm dividend payout has positive effect on the firm equity

Variables & Measurement

Dependent

Firm Performance

The effect of firm performance can lead to alter the country taxation have been extensively
researched in the literature of corporate finance. Return on assets can be taken as the best proxy to
estimate the firm performance (Martin and Sayrak, 2003). The return on assets (ROA) will be taken
as the proxy to measure the performance of the firm. It will be calculated as:

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
ROA =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Firm equity

Tobin’s Q
The firm equity as the dependent variable of the study. The Tobin’s Q was selected as the
proxy for the measurement of firm performance. The firm performance will be measured by:

𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦


QR =
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦

Independent

Corporate Taxation
The corporate taxation will be the dependent variable of the study. The study will evaluate
the effect of corporate taxation on the firm performance and their equity. The corporate taxation
will be measured by:

𝑇𝑎𝑥 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
CR =
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

Dividend Payout ratio


The dividend payout ratio is the independent variable of the study. The dividend payout
ratio is taken as the proxy for the investor protection of non financial firms. The dividend payout
ratio is measured by total dividend to net income of the firm (Khan and Jain, 2007).

Total Dividend
DPR =
Net Income

Leverage
The leverage is the control variable of the study. The leverage is taken as the proxy for the
capital structure of non financial firms. The leverage is measured by total debts to total equity
(Khan and Jain, 2007).

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡𝑠
LEV =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
Growth
The sales growth is the control variable of the study. The sales growth is taken as the proxy
for the getting growth by the non financial firms. The sales growth is measured by the variance of
current year sale to the previous year sale (Shah, 2011).

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑆𝑎𝑙𝑒
Sales growth = ln (
𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑆𝑎𝑙𝑒
)
Firm Size
The firm size is the control variable of the study. The firm size is taken as the proxy for the
getting higher total assets by the non financial firms. The firm size is measured by the log of firm
total assets (Shah, 2011).

FS = Log (𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠)


Model

ROA = α + β0 + β1(CRT) + β2(DP) + β3 (LEV)+ β4 (FZ)+ β5 (GR)+ e (1)


QR = α + β0 + β1(CRT) + β2(DP) + β3 (LEV)+ β4 (FZ)+ β5 (GR)+ e (2)

Where
ROA = Return on assets
QR = Firm equity
CRT = Corporate taxes
DP = Dividend payout
LEV = Leverage
FZ = Firm size
GR = Growth

Panel data regression


 Fixed Effect
 Random Effect
 Hausman specification

Diagnostic Tests

 Chow Test
 Bruesh Pagan Test
 Multicollinearity
References:
Ahmed Saeed, (2004), “Modeling Corporate Income Tax liabilities using company accounts”,
Arnold Jens, Cyrille Schwellnus, (2008), “Do Corporate Income Taxes Reduce Productivity and
Investment at the Firm Level? Cross-Country Evidence from the Amadeus Dataset”.
Becker et.al (2006), “Corporate Income Tax Reform and Foreign Direct Investment in Germany
–Evidence from Firm-Level Data”, Cesifo Working Paper No. 1722 Category 1: Public
Finance www.ifo.de/~DocCIDL/cesifo1_wp1722.pdf
Dr. Chandan Lal Rohra, Mohammad Salih Memon, and Dr. Mohammad Aslam Memon,
(2009), “Impact of Taxation on Financial Services Business Location Decisions in
Pakistan”, Australian Journal of Basic and Applied Sciences, 3(4): 4175-4181.
De Mooij, Ruud A. & Sjef Ederveen, (Nov., 2001), “Taxation and foreign direct Investment”,
CPB Discussion Paper, No.003.
Devereux and Rachel Griffith*, (2002), “The impact of Corporate Income Taxation on the
location of capital: A review”, Swedish Economic Policy Review, Issue 9, pp.79-102.
Hamid Mehran and Michael Suher, (2009), “The Impact of Tax Law Changes on Bank
Dividend Policy, Sell-offs, Organizational Form, and Industry Structure”, Federal
Reserve Bank of New York Staff Reports, pp no. 369.
Jiang Tianyi, "Firm Size and Information Technology Investment: Beyond Simple Averages",
ICIS 2003 Proceedings, pp80. http://aisel.aisnet.org/icis2003/80.
Krishna B. Kumar, Raghuram G. Rajan & Luigi Zingales (1999), “what determines firms’
size?”, National bureau of Economic Research.
http://www.nber.org/papers/w7208
Kadapakkam P et al. (1998), “The impact of cash flows and firm size on Investment: The
International evidence”, Journal of Banking and Finance, Vol.22, Issue (3), pp. 293-320.
Louis T. Wells, Nancy J. Allen, Jacques Morisset, Neda Pirnia, (2001), “Using Tax Incentives to
Compete for Foreign Investment” FIAS Occasional Papers 15
https://www.wbginvestmentclimate.org/uploads/Using%20TAx%20Incentives.pdf
Mr. A. Nnadi Matthias, Mrs. Meg Akpomi, (2008), “The Effect of Taxes on Dividend Policy
of Banks in Nigeria”, International Research Journal of Finance and Economics, Issue
19, pp.1450-2887.
Rajan, R. And L. Zingales, (1998a), "Financial Dependence and Growth" The American
Economic Review, vol: 88, pg: 559-586.
Roger H. Gordon, James R. Hines Jr, (2002), “International Taxation”, Handbook of Public
Economics, Vol. 4, 2002, Pages 1935-1995.
Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, Andrei Shleifer, (2009),
“The Effect of Corporate Income Taxes on Investment and Entrepreneurship”, American
Law & Economics Association Annual Meetings, Paper 80.
Vivek Ghosal and Prakash Loungani (1996), “Firm size and the impact of profit-margin
uncertainty on investment” http://ideas.repec.org/p/fip/fedgif/557.html
Weinberg A. John (1994), “Firm Size, Finance and Investment”, Federal Reserve Bank of
Richmond Economic Quarterly, Vol.80, Issue (1).
Wiji Arulampalam, Michael P. Devereux, Giorgia Maffini, (May, 2008), “The Direct
Incidence of Corporate Income Tax on Wages”.

You might also like