Corporate Tax Avoidance, Financial Constraints, and Firm Investment in Nigeria

This study empirically examines the relationship between corporate tax avoidance, financial constraints, and firm-level investment among listed companies in Nigeria. In the theoretical literature, tax avoidance is sometimes justified as a mechanism that preserves after-tax cash flows for reinvestment, particularly in environments with imperfect capital markets. However, tax avoidance may also mask information asymmetry problems that increase the cost of external financing and introduce opacity risks. Using a panel dataset of 60 firms listed on the Nigerian Exchange Group over seven years, the study measures tax avoidance through three proxies: cash effective tax rate, book-tax difference, and the Manzon-Plesko measure. Financial constraints are proxied using the KZ index adapted for Nigerian firm characteristics. The interaction between tax avoidance and financial constraints is the key variable of interest in explaining capital expenditure and research and development proxies. System GMM estimation addresses endogeneity concerns. The study expects to find that tax avoidance has a positive net effect on investment only among financially constrained firms, while unconstrained firms show no significant investment premium from avoidance activity, suggesting that the investment rationale for avoidance is context-dependent. Contributions include the first study linking the avoidance-investment nexus to financial constraint heterogeneity within the Nigerian capital market. Recommendations target FIRS disclosure requirements for major avoidance structures. Keywords: tax avoidance, corporate investment, financial constraints, book-tax difference, Nigerian Exchange Group.