A study of the influence of the Corporate tax rate on the capital structure of quoted companies at the NSE

Abstract

The corporate tax rate has been decreasing from the rate of 42.5% in the year 1990 to 30% in the year 2003. These changes would have an implication on the capital structure of companies since the Kenyan tax System is based in large part on formal lables and only indirectly on underlying asset characteristics.

This study sought to establish whether these reductions had an effect on the capital structure of quoted companies. It further sought to determine whether the Kenyan financial decision makers were sensitive to the reductions in the tax rate.

The findings of the study revealed that there was a positive relationship between the corporate tax rate and the capital structure of quoted companies. This is an indication that the reductions in the tax rate led to the reduction in the use of debt; and therefore concluded that the Kenyan financial decision makers were sensitive to the changes in the tax rate.