Effects of corporate tax on the capital structure of firms quoted at the NSE

Abstract

Corporate income tax laws have long encouraged debt. as compared with equity financing, and this un-neutrality is continued under the additional impact of excess profit taxation.This study sought to determine the effect of corporate tax on capital structure of firms quoted at the NSE. The study was conducted using a descriptive design. It was based on the firms quoted at NSE. Secondary data from annual reports of the quoted companies and the records maintained at the NSE was collected. The variables used were; debt/leverage ratio-computed as total debt divided by total debt plus equity and effective tax rate -computed as the ratio of actual tax paid from the FY 1998 to FY 2010. The study adopted descriptive design to research on the effects of corporate tax on capital structure of firms quoted at NSE. Descriptive research design was adopted since it is designed to obtain pertinent and precise information concerning the current status of a phenomena and draw valid general conclusions from the facts discovered. This research design employed both qualitative and quantitative methods that probe for deeper understanding rather than just examining surface features. Data obtained for a period of thirteen years was analyzed using financial ratios to ascertain the change in debt leverage ratio as a result of different corporate tax. Data was presented using tables. The findings of the study indicate that there is a strong relationship between corporate tax and debt-equity leverage within the Agricultural Sector. This concurs with the fact that corporate income tax laws have long encouraged debt as compared with equity financing. For the other sectors, there was a significant relationship between corporate tax and debtequity leverage.