Corporate Tax and Firm Value Under M&M Proposition II

Abstract

This study examines the effect of corporate tax on the market value of firms within the framework of the modified Modigliani and Miller (M&M) work (Modigliani & Miller, 1963). Using secondary annual data of 60 Nigerian quoted companies carefully selected from all 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 from 1990 to 2016. Based on the adjusted R-squared, approximately 60% of the total variation in the 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 the market value of firms as well as a strong feedback influence running from the market value of firms to corporate tax. Overall, our findings agree with the conclusion by Modigliani and Miller (1963) that the tax shields that levered firms enjoy significantly enhance their market value. It is also an indication that the Nigerian government is subsiding the cost of debt for the companies operating in the country’s capital market.