Examining the Effectiveness of Tax Incentives in Enhancing Profitability of Manufacturing Companies in Southwest Nigeria

This study investigated effectiveness of tax incentives in enhancing profitability of manufacturing companies in Southwest Nigeria, as there are few studies on the subject, particularly in the Nigerian context. The study was guided by optimal theory, investment behavior theory, and agency theory. There were four research questions and hypotheses developed. A cross-sectional research survey was used in the study. The population of the study included all top management personnel from the three thousand and sixty-four (3064) manufacturing companies. The study data was analyzed using descriptive statistics and inferential statistics. A modified questionnaire was used, and its face and content were validated by experts, while the construct validity requirements were met using the Fornell- Larcker criterion. Cronbach's alpha was used to test for reliability, and average value was larger than 0.7. Purposive sampling was used to choose 86 companies based on the availability and suitability of their records for the study data needs. A total of 172 respondents were chosen from 86 manufacturing companies, with two (2) respondents from each. Tax incentives had a significant effect on profitability (Adj R2 = 0.942, F(5,137)= 461.796, p= 0.000) and return on investment (Adj R2 = 0.882, F(5,137)= 213.859, p= 0.000. It was concluded that tax incentives have a significant effect on financial performance and that firm size positively strengthen the effect of interaction between tax incentives and financial performance in southwest Nigerian manufacturing companies. It was recommended that the government review tax incentive policies on a regular basis and increase tax incentives to boost economic growth through manufacturing sector. Meanwhile, companies should seek ways to raise sufficient funds to enable them to operate on a relatively large scale in order to improve financial performance.