IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 8, Issue 3 Ver. IV (May - June 2017), PP 47-53 www.iosrjournals.org DOI: 10.9790/5933-0803044753 www.iosrjournals.org 47 | Page Influence of Tax Shield on Capital Structure of Private Manufacturing Firms in Kenya Abraham Malenya 1 , Dr.Tobias Olweny 2 , Dr.Mbithi Mutua 3 and Dr.Clive Mukanzi 4 1 Phd. Candidate Jomo Kenyatta University of Agriculture and Technology Kenya 234 Lecturers Jomo Kenyatta University of Agriculture and Technology 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. Keywords: Tax Shield, Capital Structure, debt interest I. Introduction Decisions on capital structure are important for every business firm. In the corporate world it is the task of Board of Directors and Management to make capital structure decisions in a manner that will optimize the value of the firm or company (Sheikh & Wang, 2011). However optimization of the firm’s value is not an easy task since it involves the selection of debt and equity shares in a balanced percentage keeping in mind various costs and associated benefits. It is noted that a wrong decision or choice may cause a company financial distress that may eventually lead to bankruptcy. The move towards a free or liberal market from 1992 made the operating environment change thereby giving financial managers flexibility in choosing the firm’s capital structure. Capital structure is a vital management decision variable because it greatly affects and influences risk and return which in turn affects the firm’s market value. Whenever funds are supposed to be raised for various projects a capital structure decision has to be made (Salawu, 2007). Tax shield is believed to be as important as it affects the amount of debt held (Barclay & Smith, 1999). To avoid paying more tax firms prefer to take more debt. Interest multiplied by the corporation tax rate yields tax shield which is a benefit to the firms. This benefit is promoted by static trade off theory which predicts that the more tax amounts that a firm has to pay the greater the debt it will have in its capital structure Firms with higher non debt tax shields are likely to use less debt (Fisseha, 2010). Many commercial entities including private manufacturing firms have a deficit in their funding. This constrains their capital structure where the mix of debt and capital is not sufficient to meet all their viable investment needs. These firms therefore employ prudent measures to enable optimal use of financial resources (Turere, 2012). Firms may therefore face the challenges of capital structure by taking more loans, arranging for loan restructuring; negotiating longer repayment periods and increasing equity base. Firms choose alternative capital structures; they can issue a large amount of debt or very little debt, it can arrange lease financing, use warrants, issue convertible bonds, sign forward contracts and swaps in setting a capital structure that maximizes overall market value of firms ( Ngugi & Afande, 2015). Various studies undertaken in Kenya (Kiogora, 2000; Chode, 2003; Kinyua, 2005; Kuria, 2010; Turere, 2012; Wachilonga, 2013; Muema, 2013; Kiajage & Elly, 2014; Kariuki & Kamau, 2014; Ngugi & Afande, 2015; Wahome, Memba, & Muturi, 2015) remain silent on the optimal capital structure of private manufacturing firms in Kenya. It is for this reason that this study seeks to determine the influence of tax shield on capital structure of private manufacturing firms in Kenya.