Corporate Tax and Firm Value Under M &M Proposition II

  • Adolphus J. Toby Department of Banking and Finance, Rivers State University, Port Harcourt, Rivers State, Nigeria.
  • James A. Sarakiri Department of Banking and Finance, Rivers State University, Port Harcourt, Rivers State, Nigeria.

Abstract

This study examines the effect of corporate tax on the market value of firms within the framework of the Modigliani and Miller (M&M) modified work (Modigliani & Miller, 1963). Using secondary annual data of sixty (60) Nigerian quoted companies carefully selected from all the sectors of the country’s economy, we adopted the panel data methodology to carry out an inferential statistical analysis with the aid of the EViews package on the data covering the period 1990 and 2016. Based on the adjusted R-squared, approximately sixty (60) percent of total variation in market value of firms is due to corporate tax. The study also provides evidence that there is a highly significant linear relationship between corporate tax and market value of firms as well as a strong feedback influence running from market value of firms to corporate tax. Overall, our findings agree with the conclusion by Modigliani and Miller (1963) that the tax shields levered firms enjoy significantly enhance their market value. It is also an indication that the Nigerian government is subsiding cost of debt for the companies operating in the country’s capital market.

Keywords: Corporate tax, Market value of firm, Panel data.

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Toby, A. J., & Sarakiri, J. A. (2021, August 5). Corporate Tax and Firm Value Under M &M Proposition II. Journal of Accounting, Business and Finance Research, 12(2), 40-47. https://doi.org/https://doi.org/10.20448/2002.122.40.47
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