The Impact of Taxes on the Borrowing Behaviour of Nigerian Quoted Firms

Abstract

An underexplored research in modern finance theory borders on the issue of taxes and corporate debt policy. Financial theory should be able to explain why large, profitable and heavy tax paying firms do not fully exploit the potential tax savings generated by debt. At best, partial explanations exist for debt conservative behavior. This study delves into the role of taxes on corporate borrowing in Nigeria. The population of study comprises all non-financial corporations quoted on the Nigerian Stock Exchange (NSE) for the period 1999-2014 out of which 50 companies that met the minimum data criteria were utilized. Using a combination of panel data least squares regression, the Modigliani- Miller tax benefit formula, the Miller equilibrium and the Graham simulation technique, the research documents the following findings. First, the factors that exert positive influence on corporate borrowing include firm age, financing deficit, asset intangibility and expected inflation while those factors that exert negative influence on capital structure include asset tangibility, growth, size, volatility of earnings, profitability, liquidity, dividend-paying status and uniqueness of industry. Second, the marginal tax rate exerts a negative impact on corporate debt ratios and there is weak evidence that tax considerations are crucial in capital structure choice – a position that challenges the trade-off theory. The results were, at best, mixed with respect to the portability of pecking order, target adjustment, agency and market conditions models. Asymmetric information rationalizes the aggressive debt posture of smaller, less profitable, less liquid firms with more risky intangible assets and low dividend-payers. The study recommends the use of non-debt tax shelters for corporate tax planning, government simplification of tax administration.