The Relationship Between Capital Structure and Corporate Taxes for Companies Listed in the Nairobi Securities Exchange

Abstract

This study aims at finding out the relationship between capital structure and corporate taxes for companies listed in Nairobi Security Exchange. Capital structure refers to the combination of debt and equity capital that a firm uses to finance its long-term operations. The value of a firm depends upon its expected earnings stream and the rate used to discount this stream. The rate used to discount earnings stream is the firms required rate of return or the cost of capital. Capital structure decision can thus affect the value of the firm either by changing the expected earnings or the cost of capital or both. The study focused on companies listed in Nairobi Security Exchange between the year 2001and 2012. Purposive sampling technique will be used to select the sample firms. The sample size for this study is made up of forty (46) listed companies excluding the financial companies, Investment and Insurance companies due to their peculiar nature of capital struc-ture. The findings of the study shows that the relationship between debt equity ratio and taxes profit ratio was negative and significant (b1=-.032, p value 0.000). The findings imply that debt eq-uity ratio has a significant effect on taxes profit ratio. Policy makers should establish the relationship between capital structure and corporate taxes for companies quoted in NSE in Kenya, so as to assist business Consultants to advise firms on the best form of capital structure to use depending on the profitability and tax rate. Also the financial institutions should make their lending policies easier to understand. In addition, they should differentiate their lending products so that they encourage the use of debt capital by listed firms.