Effect of Taxes on Business Financing Decisions and Firm Value in Nigeria

The purpose of this study is to examine the relationship between dividend and debt policy and the value of the firm. The study analyses 1197 firm-year on an unbalanced sample of 85 manufacturing firms in Nigeria from 1984 to 2000. The model is estimated on the average values for each firm and tested for fixed and year effects using the ordinary least square (OLS) method. The study finds the opposite of tax hypotheses predictions from the regression results from pooled cross sectional data. 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 value and negative relationship between debt and value in both small-sized firms and big firms sub-sample. We conclude that dividend and debt convey information about profitability missed by the control variables. This information about profitability obscures any tax effect of financing decisions. However, there is enough evidence to conclude that earnings and investment are key determinants of firm value in Nigeria.