The Impact of Tax Shield on Capital Structure: Empirical Evidence from Nigeria

Abstract

This study evaluates the impact of tax shield on capital structure of quoted non-financial firms in Nigeria. Five hypotheses were formulated following the dependent variables of Long Term Debt Ratio and Short Term Debt Ratio. The independent variables employed for this study include: Non-Debt Tax Shield, Debt Tax Shield, Trade Payable Ratio, Firm Size and Firm Leverage. This study is based on ex-post facto research design and made use of panel data set collected from thirty five (35) non-financial companies over a five year period of 2013 and 2017 financial year. The data set used panel least square regression analysis. The result showed that both variables of debt tax shield and firm leverage significantly impact on capital structure of non-financial firms in Nigeria during the period under investigation. The study recommends among others that concerted efforts should be made by financial regulatory bodies to stabilize the tax structure/system in Nigeria. This is based on the fact that reduction of tax frictions not only increases capital buffers for all firms; it also decreases the “Risk Taking” levels of firm managers.