Determinants of Capital Structure of Listed Firms in Kenya and the Impact of Corporate Tax

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Nyang'oro, Owen
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African Economic Research consortium
Financing is among the important decisions that firms make, not limited to the source, but also the cost of financing. This study looks at the determinants of capital structure of Kenyan firms listed on the Nairobi Securities Exchange (NSE) from 2003 to 2012. The main motivation is to analyse the determinants of capital structure, including corporate tax. Conditional quantile regression is used in analysing the distributional differences of debt ratios across firms in different quantiles. Firm response to tax rate is proxied using average effective tax rate, while controlling for the standard variables that have been established in the literature to determine capital structure. The results show that some of the main variables for capital structure decision are important for capital structure decision. Also, the term structure of debt is important in leverage decisions and depends on the size of the firm, profitability, asset tangibility, and interest cost. Increase in size of the firm leads to firms shifting from long-term to short-term debt, while asset tangibility leads to a shift from short-term to long-term debt by the firm. Profitable firms at higher debt levels will reduce the use of debt in their capital structure. The effect of tax on capital structure is only significant at lower quantiles, and only for total debt ratios.