Book–Tax Differences and Firm Value: Evidence from Firms Listed on the Nairobi Securities Exchange, Kenya

Abstract

Purpose: This study examined the relationship between book–tax difference and firm value among firms listed on the Nairobi Securities Exchange (NSE), Kenya.

Material/methods: Anchored on Agency Theory, the study adopted a positivist research philosophy and a correlational longitudinal research design. Secondary data were obtained from audited annual reports and financial statements of 49 listed firms covering the period 2015–2024, yielding 490 firm-year observations.

Findings: Fixed-effects regression analysis further established a negative and statistically significant relationship between book–tax difference and firm value, after controlling for firm size, firm age, and unobserved time-invariant firm characteristics. The findings therefore indicate that increases in the signed difference between accounting income and taxable income were associated with decreases in firm value among firms listed on the NSE.

Conclusion: The study concludes that book–tax differences are an important tax-related reporting factor associated with firm valuation.

Value: It recommends that listed firms provide clear explanations of material book–tax differences, maintain consistent accounting-to-tax reconciliations, and strengthen board oversight of tax-related financial reporting. However, the findings establish an association rather than causality and should not be interpreted to mean that all book–tax differences arise from aggressive tax avoidance, since such differences may also result from legitimate differences between accounting standards and tax regulations.