Determinants of Capital Structure of Listed Firms in Kenya and the Impact of Corporate Tax
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Date
2016-11-02
Authors
Nyang'oro, Owen
Journal Title
Journal ISSN
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Publisher
African Economic Research consortium
Abstract
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.