Is Company Income Tax Relevant In Capital Structure Decisions?

Abstract

Capital structure decision is the mix of debt and equity of a company that would ensure an optimal structure. Such optimal level would guarantee maximizing the wealth of the shareholders. The long-standing theoretical base was on the premise that increases in equity ratio- a low geared/leverage structure, exhibit a healthy capital structure. The relevance of company income tax (CIT) on capital structure decisions had been under crucial investigations. While the theoretical arguments for tax sensitivity of capital structures are convincing, empirical findings instead had been, for years, very weak. Two major approaches on capital structure decision, aimed at complementing each other, were the application of behavioural approach and the use of secondary data which dominated most researches. This paper investigates the relevance of CIT on capital structure using behavioral approach. Questionnaire was designed to collect data from 180 companies-91 small scale and 89 medium scales companies-in the South West Zone of Nigeria. Findings revealed that CIT had not been very relevant in capital structure decisions of the companies studied. It was recommended that managers should watch out for other implicit factors and incorporate them apart from much concentration on CIT, in capital structure decisions.

Keywords: Capital Structure Decision, Company Income Tax, Behavioural Approach