A Service of zbw EFFECT OF TAXES ON BUSINESS FINANCING DECISIONS AND FIRM VALUE IN NIGERIA EFFECT OF TAXES ON CORPORATE FINANCING DECISIONS AND FIRM VALUE IN NIGERIA 1

Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Abstract The study sets out to measure how the taxation of dividend and debt affects firm value. Tax hypothesis predicts that firm value is negatively related to dividends and positively related to debt. The study covered 1197 firm-year observations of manufacturing firms in Nigeria from 1984 to 2000. To achieve the objective, the study estimated the model on the average values for each firm and tested for industry effects using the ordinary least square (OLS) method. We found the opposite of tax hypotheses predictions from the regression results. We hypothesized that the relationship between dividends, debt and firm value will be affected by the size of the firm. We therefore partitioned the firms into two on the basis of size measured as market capitalization. We estimated separate equations for each sub-sample and found positive relationship between dividend and firm value and negative relationship between debt and firm value in both small-sized firms and big firms' sub-sample. The study concludes that dividend and debt convey information about profitability of firms. This information about firms' profitability obscures any tax effect of financing decisions. However, we found that earnings and investment are key determinants of firm value in Nigeria. The Problem Tax constitutes a potentially important consideration in firms' financing decisions. If a company is financed by debt capital, there will be tax relief available on interest payments. Alternatively, if the company is financed with shareholders' fund (that is equity capital), then dividend will be paid on the equity from the profit after tax, which will in turn give rise to a liability for personal income tax. Over the years, researchers have examined the differential impact of the tax treatment of debt and dividends on corporate financial policy in developed countries. However, existing studies devoted to examining the impact of taxes on financing decisions and firm value is scanty in Nigeria. This is a gap this study attempts to fill. The objectives of the study are stated in section 1.2 below. Objectives of Study This study evaluates the impact of taxes on corporate financing decisions and firm value in Nigeria. Specifically, the study sets out to: 1. analyze the effect of tax changes on corporate financing decisions, 2. assess how the differential tax treatment of dividends and debt affects the overall cost of capital and firm value