Influence of Tax Shield on Capital Structure of Private Manufacturing Firms in Kenya

Abstract

The main objective of the study was to determine the influence of tax shield on capital structure of private manufacturing firms in Kenya. The measure of tax shield for this research is corporation tax on interest on debt. Ascertaining and attaining an optimal capital structure for many firms is not an easy task. In Kenya many manufacturing firms are struggling to operate while others have been compelled to shut down. This study used descriptive survey design on a population of 853 firms as per KAM members’ directory of 2015. Using simple random sampling a sample of 208 CFOs of private manufacturing firms were selected from a target population of 455 CFOs of firms situated in Nairobi and its surrounding areas. The researcher collected primary data using self-administered questionnaire to obtain financial measures from the chief finance officers (CFOs) of these firms and secondary data was collected through a data survey sheet and document review form. Data was analyzed using Statistical Package for Social Sciences (SPSS) version 22. Descriptive and inferential statistics were employed. Under descriptive statistics percentages of responses and means of items was computed. In quantitative analysis Karl Pearson’s correlation, multiple linear regression, ANOVA and E -Views were used. The study concluded that high debt tax shield cause increase in debt. The results also revealed that the higher debt tax shield the higher tax advantage from debt interest to the firm. In addition, the results revealed that with high tax rate, the firm uses more debt and has more income to shield from tax.