The Effect of Corporate Taxes on Investment Decisions of Companies Listed at the Nairobi Securities Exchange

Abstract

The Kenyan corporate income tax system provides investment incentives that vary across asset types. Do corporations investment choices respond to these differences and if so by how much? This research analyzes the effect of corporate income tax on investment decisions of companies listed at the NSE. While policy makers have made effort to impose more uniformity on corporate tax policies, no empirical study exists to quantify the extent to which corporate income tax have altered the structure of investment decisions. This is rather unfortunate because, as pointed out in Feldstein (1982) capital consists of many types of equipment and structures. The objective of this study is to establish the relationship between corporate taxes and investment decisions of the companies listed at the NSE. Descriptive Research was used in this study which involved the analysis of quantitative data. The data was the financial statements of the companies listed at the NSE. It was a census study this means that data from the whole population was analyzed. Secondary data was collected from all the companies listed at the NSE from 2008 to 2012. Data analysis was done using the SSPS where the regression analysis, ANOVA and correlation coefficients were generated. T-test was done to prove the relevance of the study. It was concluded that corporate tax affect investment decisions of the companies. All the corporate tax variables affect the depended variables. The depreciation tax shield has a very small negative value this implies that to a larger extend it reduce the corporate taxes amount and increase the amounts available for investment. The interest tax shield, After Tax cash flow and corporate tax all affect investment. Corporate tax is the highest in reducing the amounts available for investment. The overall effect of these tax incentives is therefore asset specific, depending on the characteristics of the physical asset and, to a lesser extent, the industry in which the asset is placed.