Taxation, Capital Structure Decisions, and Firm Value Among Listed Firms in Nigeria

This study examines the influence of the debt tax shield on capital structure decisions and firm value among companies listed on the Nigerian Exchange Group. The Modigliani-Miller theorem, with taxes, predicts that firms should prefer debt financing to exploit the interest tax deductibility advantage, yet real-world capital structures deviate from this prediction due to financial distress costs, agency conflicts, and market imperfections. In the Nigerian context, where credit markets are underdeveloped and tax shield exploitation is constrained by interest deduction limitations, the tax-capital structure nexus requires empirical examination. Using a panel dataset of 55 listed firms over eight years, the study estimates the relationship between corporate tax rates, debt ratios, and Tobin's Q as a measure of firm value. Interaction models test whether the debt tax shield is more valuable for profitable, high-tax-paying firms. Dynamic panel GMM estimation addresses potential endogeneity in capital structure decisions. The study expects to find a positive relationship between marginal tax rates and leverage ratios, but a weaker effect than predicted by the trade-off model, consistent with the presence of non-tax costs of debt. It also anticipates that firm value is positively associated with leverage only up to an optimal debt threshold beyond which financial distress costs dominate. Contributions include the first comprehensive capital structure-tax study incorporating recent IFRS adoption effects in the Nigerian context. Keywords: debt tax shield, capital structure, firm value, trade-off theory, Nigerian Exchange Group.