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Tax Planning and Firm Value: Empirical Evidence from Nigerian Consumer
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Research Journal of Finance and Accounting [Link]
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.7, No.12, 2016

Tax Planning and Firm Value: Empirical Evidence from Nigerian

Consumer Goods Industrial Sector
Dr. Nwaobia Appolos N, * Kwarbai Jerry D., and Ogundajo, Grace O.
School of Management Science, Department of Accounting, Babcock University, Ilishan-Remo, Ogun state
Nigeria.

Abstract
Taxes on corporate profits are mandatory and usually constitute a large outflow for firms that, if not planned,
lead to disproportionate and unwilling transfer of corporate resources to the government with its negative impact
on the operating capacity and firm value. In the light of this, the study examined the effect of tax planning on
firm value. Ex-post facto research design was adopted. The study covered 50 firm-year observations for the
period, 2010-2014. Data were drawn from the published financial statements of the sampled companies and
analyzed using descriptive and inferential statistics centred on specified panel regression model. The joint effect
of the considered tax planning proxies on the firm value was significant (F-stat. =2.580; P-value = 0.032). While
Effective tax rate (ETR), Dividend (DIV) and Firm age (FAG) are positively and significantly related to firm
value, firm size, leverage and tangibility exert negative effect on firm value. The Adj. R2 value of 20.6% was not
sufficiently strong in explaining the variation in firm value. The study concluded that wholistic approach to tax
planning and optimal mix of tax planning strategies are important determinants of their effect on firm value.
Keywords: Firm value, Tax planning, Political cost theory, Tangibility, leverage.

1. Introduction
Tax is one of the major instruments of fiscal policy for regulating the economy of any nation. At various times,
successive governments in Nigeria have employed the instrument of tax policy to encourage industrial and
corporate growth in the private sector (Nwaobia, 2014). On the opposing side, taxation and tax policies in
Nigeria do equally act as disincentive to manufacturing firms to create value for stakeholders and enhance the
value of the firms. As noted by Gatsi, Gadzo and Kportorgbi (2013) taxation, observably, plays a role in the
misfortunes of the manufacturing sector because tax policies, apart from generating revenue for the state, serve
several other purposes. It can be used as an avenue to protect infant industries, create incentive for investors to
invest in certain areas of the economy or to create disincentive for other activities Gatsi, Gadzo and Kportorgbi,
2013). For example, Ihendinihu (2008) in Dickson and Nwaobia (2012) noted that unfriendly tax policies is one
of the many reasons for the growth of the underground economy, where law-abiding individuals and corporate
citizens seek refuge from wrongs inflicted on them by government.

The major challenge of corporate entities, and in particular manufacturing firms, come in a midst of high
corporate tax rates and multiples of other taxes that lead to high effective tax rates far above the statutory
company income tax rate. With the introduction of the Information Technology tax, there are about forty
different taxes levied on companies and individuals (Taxes and Levies, Approved List for Collection Act 1998,
Bammeke, 2012). Many of these taxes from the different levels of government overlap and are forcefully
extracted from corporate organizations. The effect of these exactions of course is high cost structure for firms
(Nwaobia, 2014). One will not fail to agree with Nnadi & Akpomi (2008) that a tax policy defines the cost
structure of firms as it is factored into pricing. In addition, tax costs and eventual payout deplete the disposable
income of individuals as well as the distributable profits of corporate organizations. These taxes in fact, do
translate to a substantial cost to organizations and if not properly planned and managed can have adverse impact
on the bottom line, cash flow and capacity to invest.
To mitigate the effect of taxes on liquidity and profitability of corporate bodies and by extension firm value, tax
planning becomes imperative. But unfortunately, many companies are ignorant of the strategies they can adopt to
legally mitigate their tax burdens. Over the years, experience has shown that the tax authorities can dip the
largest possible shovel into the resources of an organization if left vulnerable. Fortunately, the law supports a tax
payer if he arranges his affairs in such a way that the tax chargeable is minimized or even avoided (Ayrshire
Pullman Motor services and David M. Ritchie V. Commissioner of Inland Revenue (1929) in TC 745. In this
case, the Lord President (Lord Clyde) stated,
No man in this country is under the smallest obligation, moral or otherwise, so as to arrange
his legal relations to his business or to his property as to enable the Inland Revenue to put the
largest possible shovel into his stores. The Inland Revenue is not slow and quite rightly to take
every advantage which is open to it under the taxing statutes for the purpose of depleting the

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taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent so far as
he honestly can the depletion of his means by the Revenue.

This view was reiterated in IRC V. Duke of Westminister (1936) 19 TC 490 by Lord Temlin when he averred
that:
Every man is entitled if he can, to order his affairs so that the tax attracting under the
appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to
secure this result, then, however unappreciative the Commissioners of Inland Revenue or his
fellow taxpayers may be of his ingenuity he cannot be compelled to pay an increased tax.
Therefore, a company is not a bad corporate citizen if it can organize its business or trade in a legal manner to
minimize its tax liability. This is the concept and essence of tax planning. Tax planning is thus one of the vital
decisions that confront any proactive company management. Tax planning therefore is a conscious effort made
by a tax payer, within the ambit of the law, to minimize the tax payable by the individual or entity. Tax
planning has been variously described as managing taxable income downward (Ayers, Jiang and Laplante
2006); legitimate methods of increasing an entity’s or individual’s tax efficiency (Morien 2008); all activities
designed to produce a tax benefit (Abdul-Wahab and Holland 2010) or legal activities designed by tax payers to
lower the effective tax rate, described as the actual measure of the company’s tax burden (Sabli, N. and Md
Noor, R., 2012).

Companies, in essence, prefer paying lower taxes or get some tax savings on tax payable given that the main
purpose of the company is to maximize it’s after tax profit by minimizing its overall effective tax rate of the
company. Indeed, many tax planning approaches have been used by companies to achieve this objective (Seyram
& Holy 2013).

Prior literature has noted aggressive tax planning activities among large firms (Rego, 2003 and Frank, Lynch and
Rego, 2009). Some of such studies have reported that large firms have sufficient resources and better
opportunities to undertake tax planning strategies, for example, by utilizing the tax incentives provided to them.
An effective tax planning strategy will reduce a firm's ETRs, to the extent that it falls below the statutory tax
rate.

Consequently, the tax planning strategy will give a positive impact on a firm's cash flow and increase its after tax
rate of returns. On the opposing side, there are potential costs related to strategies to minimize taxes such as
implementation and transaction costs, possible penalties imposed by the tax authorities and reputation risks that
must be pondered. These notwithstanding, Khaoula, Amor & Ayed (2013) have posited that the role of tax
planning in the integration process of streamlining of financial and economic activity of the companies according
to the strategy of its development have become increasingly necessary. Analyzing the specific mechanism
through which tax planning affects firm market performance is important for a thorough understanding of the
relation between tax planning and firm market value.

Firm value is generally taken to mean an economic measure reflecting the market value of a whole business. It is
a summation of the claims of all contributors to the assets of a firm namely: creditors (secured and unsecured)
and equity holders. In finance literature, firm value is the sum of the market value of equity and the market value
of debt (Nwaobia, Kwarbai and Ajibade, 2015). Firm value is enhanced when shareholders’ wealth is increased
through profits and improved cash flow; hence the importance of tax planning as an integral part of the financial
planning programme of any entity.

A number of empirical studies on the impact of tax planning (using effective tax rate as proxy) on company
earnings and value exist. Such studies include Phillips (2003), Ayers, Jiang and Laplante (2006), Wilson (2009),
Minnick and Noga (2009), Noor (2010) and Md Noor, Fadzillah and Mastuki (2010). None of these studies have
considered the influence of the selected tax planning strategies in this study on value of firms in emerging
economies like Nigeria. This study therefore sought to provide evidence on the effectiveness of these selected
tax planning strategies in driving corporate value of consumer goods manufacturing firms in Nigeria.

This study extends extant literature on the firms’ efforts and strategies to decrease their corporate tax liabilities
and specifically investigates the influence of tax planning on firm value. The study also provides interesting
insight into the structuring of tax planning strategies by firms and is expected to stimulate research into
appropriate delineation of tax planning strategies into those that could positively influence firm value in the short
- run and those that are better utilized for the purpose of cash flow enhancement, that would in the short run,

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improve capacity utilization and positively impact firm value in the long-run. Determining the optimal mix of
strategies is important for tax planning to enhance firm value.
The rest of this paper is organized as follows. In section 2, we review related literature and highlight the
theoretical underpinning for the study. Section 3 presents the methodology of the study. The empirical results
and discussions are presented in section 4, while we conclude the study in section 5.

2. Literature Review
Studies on tax planning and firm performance cum value have yielded mixed results. Desai and Hines (2002)
provide evidence on firm performance and tax planning behavior of firms. Again, the study investigated the
relationship between tightening of tax systems and market value of firms. This study of 850 listed US firms
established that intensive tax planning is associated with higher firm performance. On the other hand, the study
reported that tightening of the tax system is positively associated with higher market performance of firms.
These results are similar to those reported by Chen, Chen, Cheng and Shevlin (2010).

The study by Desai and Dharmapala (2007) examined the link between tax planning, corporate governance and
firm performance. In their study, Firms’ performance is measured using Tobin’s q and governance quality is
proxied by the level of institutional ownership. Tax planning is measured by inferring the difference between the
income reported to capital markets and tax authorities (the book-tax-gap). Results of analyses revealed that the
average effect of tax planning on corporate performance is not significantly different from zero. In other words,
there is no relationship between tax planning and firm performance. The study however reports a positive
association between tax planning savings and performance for well-governed firms. The study concluded that
corporate governance mediates the tax planning-firm performance relationship. Abdul-Wahab’s (2010) study
however indicated a negative relationship between firm value and tax planning activities. The study noted that as
tax planning activities increase, the tax costs and risks outweigh the benefits.

Kawor & Kportorgbi (2014) examined the effect of tax planning on firms market Performance in Ghana’ using
22 non-financial companies listed on the Ghana Stock Exchange between 2000 and 2011. The study found that
as tax rates increased, firms intensified tax planning activities. Firm performance and sales growth and firm size
are found to be positively associated while firm’s age and financial leverage are negatively associated with
firms’ market performance.

Ftouhi, Ayed & Zemzem (2014) in their study ‘Tax planning and firm value: evidence from European
companies’ using Regression analysis model (Generalized Least Squares (GLS) regression). Tobin’s q model
was adopted by the study to examine the relationship between firms’ value and tax planning with firm size,
leverage, capital intensity, Dividend and Earnings management. As control variables, the study found that tax
planning can be considered as steps taken by taxpayers so as to reduce tax liability in obtaining the tax saving
benefits. The correlation analysis reveals that the correlation coefficients between various independent and
control variables are significant.

Wilson (2009), using a sample of 59 firms accused by the US government of engaging in tax shelter activity,
examined the characteristics and financial reporting effect of tax shelter participation, on book-tax-differences of
tax shelter participants and whether tax sheltering is associated with wealth creation for shareholders or with
managerial opportunism. The result indicated that active tax shelter firms with strong corporate governance
exhibit positive abnormal returns. This finding is consistent with tax sheltering being a tool for wealth creation in
well-governed firms. This view is shared by Desai and Dharmapala (2009) who posited that tax avoidance has a
positive effect on well-governed firms than on poorly governed firms. While Hanlon and Slemrod (2009)
produced evidence that firm characteristics plays an important role in determining the influence of tax avoidance
on firm value, Koester (2011) affirmed that governance structure moderates the relationship between tax
avoidance and firm value.

Evidence provided by Sabli, and Md Noor, (2012) is also in support of tax planning improving firm performance
and value. For Nazik and Ratman (2015), tax optimization has a destructive effect on firm value. Though tax
optimization may minimize tax burden, in their view, it exposes the firm to financial difficulties as control of
non-tax costs are neglected. The outcome of the study by Hanlon and Heitzman (2010) revealed that the
relationship between tax optimization and firm value is not clearcut.

Overall, literature reveals that just as the results of the joint effects of the tax planning proxies on firm value are
mixed for various studies, the individual effects of the tax planning strategies on firm value for each of the
studies are also mixed.

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Theoretical underpinning
This study is anchored on the Political cost theory and the Managerial Opportunism theory (an extension of the
agency theory). The Political cost theory advanced by Salamon and Siegfried (1977), maintains that larger firms
possess superior economic and political power relative to small firms. Larger firms take advantage of their
economic and political power to mitigate their tax burden as they are able to engage in aggressive tax planning
and can manipulate the political process in their favour.

In support of this theory, Porcalo (1986) submitted that larger firms have smaller effective tax rates (ETRs)
while Rego (2003) posited that economies of scale can significantly affect a firm’s ability to reduce its tax
burden. Loretz and Moore (2009) however, argue that tax planning decisions, similar to a firm’s operational
decisions, are made in a competitive environment. This implies that where tax payments made by the company
deviate significantly from those of the peer group it, could lead to “reputational loss.” According to them,
managers have to balance the benefits of reduced tax burden against the costs of a loss of reputation if they
deviate too much from the behavior of their peer group.

The proponents of the Managerial Opportunism theory, Desai and Dharmapala (2006) and Desai, Dyck and
Zingales (2007) consider the interaction of tax planning activities and the agency problems inherent in public
companies. The theory argues that the obfuscatory tax planning activities can create a shield for managerial
opportunism and the diversion of rents. They posit that straightforward diversion and subtle forms of earnings
manipulation can be facilitated when managers undertake tax avoidance activity. It is their view that tax planning
has the direct effect of increasing corporate profitability and firm value only for firms with strong governance
institutions. Where there are weak governance institutions, increased opportunities for managerial rent diversion
dominate these effects.
On the bases the forgoing reviewed literature, this study hypothesizes that:
HO: Tax planning has no significant effect on firm value.

3. Methodology
An ex-post facto research design was adopted in this study. The population comprised of 80 manufacturing
companies listed on the Nigerian Stock Exchange as at 31 Dec 2012 (NSE Fact book 2013). A sample of 10
companies in the consumer goods sector and of different sizes was chosen on purpose. The study covered 50
firm-year observations for the period, 2010-2014.

Measurement of variables
Firm value
Scholars have widely employed Tobins Q as a proxy for firm value, particularly in valuing publicly traded
companies (Nwaobia, Kwarbai & Ajibade, 2015; Tahir and Razali, 2011; & Smithson & Simkins 2005). This
study used approximate Tobin’s Q as introduced by Chung and Pruit (1994) and used in Nwaobia, Kwarbai &
Ajibade, (2015). It is calculated thus:
Approximate Tobins Q = MVE+PS+DEBT/TA

Where:
MVE: market value of equity
PS: The liquidating value of the firm’s outstanding preferred stock
DEBT: The value of firms’ short term liabilities net of its short term asset, PLUS the book value of the firms
long term debt
TA: The book value of the total assets of the firm

Effective Tax Rate (ETR)

This has been used in prior studies like Rego (2003), Khaoula, Amor & Ayed (2013) and Seyram & Holy
(2013), to measure a reflection of tax planning that decreases a firm’s tax liability without necessarily decreasing
its accounting income. Corporate ETR basically assesses the tax performance of firms. Thus, it is the best
measure to evaluate the actual corporate tax burdens. ETR is a commonly used measure of a firm’s tax burden.
ETR provides a basic summary statistic of tax performance which describes the amount of taxes paid by a
company relative to its profit before tax. This measure reflects aggressive tax planning through permanent book-
tax differences, Khaoula, Amor & Ayed (2013). The ETR is computed as tax paid/Profit before tax.

CONTROL VARIABLES
Our control variables largely follow Biddle, Hilary and Verdi (2009). We include:

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Firm size (SIZE)

Corporate tax planning is a professional activity that demands the requisite resources and skills for its effective
execution. It follows therefore that Firm size and capacity in terms of resources available to the firm is believed
to directly correlate with the extent of a firm’s tax planning activities (Nwaobia, 2014). To design and execute a
robust tax planning scheme requires the employment of tax experts to man the tax department. Where the
company decides to outsource, enormous outflow of resources goes with the payment of the attendant
professional fees. Based on this reality, Md Noor, Fadzillah and Mastuki (2010) submit that not all companies
have the same opportunities to carry out tax planning. It is therefore imperative to control for the effect of the
size of the firm on tax planning studies. Khaoula, Amor & Ayed (2013) and Rego (2003) observe that larger
firms can achieve economies of scale via tax planning and have the resources and incentives to decrease group
tax. Large firms are reported to have sufficient resources and better opportunities to undertake tax planning
strategies, for example, by utilizing the tax incentives provided to them. An effective tax planning strategy will
reduce a firm's ETR, to the extent that it falls below the statutory tax rate.
Firm size in this study is measured as Ln(Total Assets).

Leverage (LEV)
Harris & Raviv (1991), Rajan & Zingales (1995), Booth et al. (2001), Chen (2004), Biddle, Hilary and Verdi
(2009), Sehrish, Zeeshan and Bilal (2013) defined Leverage as total debts divided by total assets. The concept
of using total debts is to avoid the conflicting relationship of long-term debt or short-term debt with Leverage.
Some of these previous studies (for example, Wald 1999 in Sehrish et al, 2013, Akinlo and Asaolu, 2012) have
shown that there is positive relationship of leverage with short-term debt and negative relationship with long
term debt. The beauty of leverage as a tax planning point lies in the tax shield it provides, which increases the
earnings of shareholders and by extension the firm value. It is therefore, the fact of the deductibility of the
interest charges which makes the use of debt in the capital structure beneficial to a firm. Leverage has been
adopted by Phillips (2003), Sabli and Md Noor (2012), Md Noor, Fadzillah and Mastuki (2010), in ETR/tax
planning studies.

Tangibility of Assets (TANG)

According to Rajan & Zingales (1995), Sehrish, Zeeshan, Bilal (2013) Tangibility of Assets is also an important
factor in determining firm values. It shows the impact of tangible assets of firms on the Leverage level of firms.
According to Static Trade off Theory, the Tangibility of Assets is positively associated with the Leverage. If a
firm has a higher amount of fixed assets it can acquire loan on more favorable terms. Tangibility defines the
level of a company’s investment in fixed assets and by implication the level of capital assets related incentives a
company can enjoy. This is the context of use of tangibility in this study and in this sense it has been found to be
a good tax planning point. Allowances and incentives based on capital intensity include:

Capital allowance (initial and annual)

Capital allowance is a standardized depreciation allowance granted to an entity for incurring and using
qualifying capital expenditure during a year of assessment for the purpose of deriving its income. Initial and
annual allowance rates vary depending on the nature, type and purpose of the qualifying capital expenditure. For
example, in Nigeria, Capital expenditure incurred by companies engaged in the mining of solid minerals enjoy
accelerated allowance, that is, a one off allowance of 95% of the value of the asset. Also, replacement of
industrial plants and equipment attracts the same initial allowance of 95%. This goes a long way in enhancing
the liquidity and cash flow position of such companies.

Investment Tax Credit (ITC)

This is an allowance and incentive given, in addition to capital allowance, to encourage companies to acquire
and use new buildings and equipment for the purpose of enhancing their production. It is aimed at encouraging
asset reconstruction and replacement as well as plant expansion. The credit given is 10% of the cost of the asset,
deductible from tax liabilities within a maximum of 10 years (sect.28, Companies Income Tax Act, Cap 60, LFN
2004). From January 1, 1996, companies engaged in Research and Development activities for commercialization
in Nigeria, are given 10% ITC on their qualifying capital expenditure.

Re-investment Allowance (RIA)

This is given to companies that have been in existence for not less than 12 months. It seeks to encourage
reinvestment of profits for expansion purposes. The allowance is restricted to a percentage of statutory income
but computed as a percentage of expenditure incurred on a qualifying project.
Conventionally, RIA is estimated at 60% of qualifying capital expenditure incurred by a company for several
years and this could be used to offset 70% of the statutory income in the year of assessment. If the company is

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located in the promoted areas, 100% of the statutory income may be offset, while in non-promoted areas, 100%
of the statutory income may be offset if the company attains a productivity level exceeding the government bar.
Any unabsorbed allowance may be carried forward to the following year until fully utilized (Ohaka & Agundu
2012, Olatundu, 2008).
These allowances tend to have positive impact on liquidity, operating capacity and by extension, firm value
The Tangibility of Assets is measured as Non-current assets/total assets (Rajan and Zingales 1995; Omet &
Nobanee 2001; Buferna, Bangassa, & Hodgkinson 2005; Khrawish & Khraiwesh 2010).

Firm Age (FAG)

In this study, firm age is used as a proxy for firm’s tax planning experience. Institutional knowledge in tax
planning is a function of age and accompanying experience of managers in tax matters in an organization.
Experience goes with technical skill, knowledge and competence and constitutes the thread that binds all tax
strategies into productive tax planning activity (Nwaobia, 2014). There tend to be a relationship between
industry-specific managerial experience and innovations in different facets of a firm’s activities. It is costly to
replicate firm-specific skills, knowledge and relationships acquired and institutionalized over a period of time.
Some tax managers may spend their entire career in a single organization and it may take several years to
develop such firm-specific tax and business expertise that such managers and experts have acquired. Managerial
knowledge about how to deal with institutional shortfalls and governmental obstacles is, no doubt, an important
and rewarding factor in tax planning and management.
Firm age/tax planning experience is measured in this study as the log number of years between date of
establishment of company and the year of observation, that is, 2014.

Dividend (DIV)
Results of studies on the influence of dividend policy on firm value are mixed. While some argue
that dividend payout is irrelevant as a firm- value causative factor (for example, Modigliani and Miller ), some
others believe on the relevance of dividend policy in influencing firm value (for example, Amidu, 2007; Al-
Kuwari, 2009; Murekefu and Ouma, 2012). This study aligns with the dividend relevance group and adopts the
dividend payout ratio as a control proxy.
Dividend is firm’s common/ordinary dividend over the years distributed to the shareholders based on their
holding. The payout ratio is computed as dividend declared divided by total after-tax earnings.

Model specification
We put forward the following regression model to examine how tax planning affects firm’s value:
Tobin’s Qit = β0 + β1ETRit+ β2SIZEit + β3 LEVit+ β 4 TANGit + β5 DIVit + β6FAGit + εi
A prior expectation
Β1 – β6 are expected to be greater than zero and positively signed.

4. Analyses, Findings and Discussions

4.1 Descriptive Analysis
Table 1 below highlights the mean, standard deviation, minimum and maximum values of the variables used. With the
exception of firm value, dividend and age, the values of the variables cluster around their means. All variables except
firm value and ETR are platykurtic in nature since their values for kurtosis are less than 3. This indicate a higher than
normal distribution.

Table 1: Descriptive Analysis

Std. Jarque-
Mean Median Max Min Skewness Kurtosis Prob
Dev. Bera

TOBINSQ 11.331 4.206 71.691 0.209 17.225 2.091 6.632 63.903 0

ETR 0.271 0.28 0.898 -0.377 0.144 -0.226 16.038 354.576 0
SIZE 8.559 8.225 10.805 1.145 1.44 -2.453 15.179 359.167 0
LEV 0.388 0.462 0.93 0.004 0.284 -0.211 1.787 3.439 0.179
TANG 0.975 0.366 31 0.004 4.342 6.813 47.629 4536.284 0
DIV 3.409 1.25 20 0.004 4.908 1.97 6.395 56.358 0
lnFAG 3.833 3.951 4.745 2.283 0.656 -0.879 3.16 6.492 0.039
Source: Authors’ computation (2016)

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Table 2 shows the correlation matrix. The explanatory variables SIZE, ETR, DIV and FAG, are positively
associated with the firm value while TANG and LEV are negatively correlated with firm value. FAG has the
highest positive correlation with Firm value (Tobins Q r =0.3546). All relationships are significant at α = 0.05.
It is to be noted that the correlation matrix in table 2 merely gives the relationship among the variables; it does
not tell the impact of the explanatory variables on firm value. Our OLS modeling in section 4.2 captures this
aspect of the analysis.

Table 2: Correlations Matrix

TOBINSQ ETR SIZE LEV TANG DIV FAG

TOBINSQ 1.00000

ETR 0.08811 1.00000

SIZE 0.13289 0.04707 1.00000

LEV -0.33578 0.01526 -0.16290 1.00000

TANG -0.11013 -0.09768 -0.75975 -0.14896 1.00000

DIV 0.09297 -0.20281 -0.20841 0.32400 -0.06416 1.00000

FAG 0.35456 0.08559 0.25183 -0.06993 -0.32891 0.25665 1.00000

Source: Authors’ computation (2016)

4.2 Ordinary Least Square (OLS) Modeling

The result of the multiple regression analysis is presented in Table 3.
In table 3, we evaluate the regression model given in the equation. We use Adj. R2 to assess the proportion or
percentage of the variance in the dependent variable that is explained by the independent variable within the
model. The coefficients of the variables (denoted by β in the model) indicate the extent to which the dependent
variables will change following any change in independent variables while other independent variables are held
constant. The significance of the coefficients is assessed using the t-statistic while the overall goodness of fit of
the model and its significance are assessed by the use of the F-statistic.

Table 3. Result of Multiple Regression Analysis

Model
Variable

Coefficient Std. Error t-Statistic Prob.

C -22.064 15.548 -1.420 0.163

ETR 18.524 10.365 1.790 0.081
SIZE -0.053 1.706 -0.030 0.975
LEV -4.193 8.386 -0.500 0.620
TANG -28.346 12.559 -2.260 0.029
DIV 1.129 0.487 2.320 0.025
FAG 9.533 4.081 2.340 0.024
2
R 0.304
2
Adj. R 0.206
F-statistic 2.580
Prob(F-statistic) 0.032
No. of Obs. 50
Source: Stata 11 output (2016)

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Diagnostic Tests
To ensure that we draw correct inferences from our analysis, we performed some diagnostic tests on the data set.
The result of the Ramsey Reset test shows a p-value of 0.2105, implying that the null hypothesis that model has
no omitted variables may be accepted. Also, Wooldridge test for autocorrelation in panel data (with p-value of
0.1086), indicated no first-order autocorrelation (see appendix 1).

Results and Discussions

The results of the robust pooled OLS show that the coefficient of the tax planning proxy (ETR) is statistically
significant at 10% level and has positive value of 18.524 (p-value 0.081). The control variables of Size and
leverage(LEV) exerted negative and insignificant effect on firm value while tangibility exerted negative but
significant impact on firm value at 5% level. Firms’ payout ratio proxy by dividend (DIV) and firm tax
experience proxy by firm age (FAG) are statistically significant and positively associated with firm value. The
Adj. R2 value of 0.2064 reveals that tax planning and its control variables (ETR, SIZE, AGE, LEV, DIV and
TANG) account for only 20.64% percent of the variation in the consumer goods industrial sector’s performance
(Firm value). Though the individual effects of the proxies on firm value are mixed, the F-ratio of 2.508 and
associated P-value of 0.032 indicate a joint, statistically significant effect of ETR, SIZE, LEV, TANG, DIV and
FAG on firm value. The significant nature of the F-stat implies that the overall goodness of fit of the model is
satisfactory.

The positive association/effect of ETR and firm value aligns with many prior studies such as Khaoula, Amor &
Ayed (2013), Chen, Chen and Cheng and Shevlin (2010), Md Noor, Fadzillah and Mastuki (2010), Wilson
(2009) and Desai and Hines (2002). The negative effect of LEV on firm value is also in agreement with some
prior studies, for example, Karwor and Kportorgbi (2014). However, the negative association between firm size
and firm value is in opposition to the results of studies by Nwaobia (2014), Khaoula, Amor & Ayed (2013), Md
Noor, Fadzillah and Mastuki (2010) and Rego (2003). These studies have posited that large firms have both the
resources and the political power to undertake tax planning activities that can positively impact their firm
performance and value. The results of this study with regard to DIV and FAG are in accord with many prior
studies, such as Murekefu and Ouma, (2012), Al-Kuwari (2009) and Amidu (2007) that have maintained the
relevance of dividend payout as a factor that influences firm value. Many investors are interested in maintaining
a steady source of cash. Such natural clienteles are always willing to pay a premium to acquire stocks that
guarantee constant dividend payout. The studies of Nwaobia (2014) and Dyreng, Hanlon and Maydew (2008)
concluded that tax planning experience and manager effects (proxied by FAG) positively drive tax planning
activities that enhance firm performance and value. Experience of managers in a firm, institutional knowledge
handed over from generation to generation, including firm’s established relationship with government agencies,
go a long way to impact the firm’s tax management activities. Overall, this study affirms the political cost theory
but could not conclusively support the agency cost (managerial opportunism) dimension that tax planning
benefits firms with strong governance institutions more than their peers.

Conclusion and Recommendations

This study examined the effect of tax planning on firm value. The study established that tax planning affects
corporate firm value but the nature of the effects depends on the tax planning variables adopted.

While some of the tax planning variables such as ETR, DIV and FAG have positive effect on firm value, SIZE,
LEV and TANG have negative effect. Results suggest that ETR, SIZE and DIV are important tax planning
variables that can positively impact the value of Consumer goods manufacturing firms in Nigeria.

Findings of this study therefore provide interesting insight into the structuring of tax planning strategies by firms
and are expected to stimulate research into appropriate delineation of tax planning strategies into those that could
positively influence firm value in the short - run and those that are better utilized for the purpose of cash flow
enhancement, that would in the short run, improve capacity utilization and positively impact firm value in the
long-run. The study thus concludes that only an optimal mix of tax planning strategies could yield optimal
benefits in the area of firm value enhancement to manufacturing firms in Nigeria.

The present study provided empirical support for the political cost theory which asserts that larger firms take
advantage of their economic and political power to mitigate their tax burden as they are able to engage in
aggressive tax planning and can manipulate the political process in their favour. In Nigeria, such power matters.

From the outcome of this study, we recommend that Management commitment to tax planning as part of the
overall financial planning of the firm is important. This is because tax planning activity requires the deployment

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of resources and the experience of knowledgeable practitioners to produce effective results; tax implications of
all business transactions need be considered before execution. Nigerian tax laws and environment are complex
and volatile as they change almost on yearly basis. This makes it difficult for an average corporate management
to navigate, understand and fully explore the opportunities and gaps in the tax statutes for beneficial tax
planning. This study recommends firms’ use of tax professionals and consultants for effective tax planning that
will meet corporate tax needs. Firms should not hinge their firm value maximization mechanism on tax planning
alone since this has been found in this study to explain variations in firm value indicator from a weak position.

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Appendix

Ramsey RESET test using powers of the fitted values of tobinsq

Ho: model has no omitted variables
F(3, 40) = 9.36
Prob > F = 0.2105

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of tobinsq

chi2(1) = 16.94
Prob > chi2 = 0.0000

Wooldridge test for autocorrelation in panel data

H0: no first-order autocorrelation
F ( 1, 9) = 3.172
Prob > F = 0.1086

Linear regression Number of Obs = 50

F( 6, 43) = 2.58
Prob > F = 0.0318
R-squared = 0.3035
Root MSE = 15.302
--------------------------------------------------------------------------------------------------------------
Robust
Tobinsq Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+-------------------------------------------------------------------------------------------------
etr 18.52402 10.36468 1.79 0.081 -2.378358 39.42639
Size -.0532186 1.706587 -0.03 0.975 -3.494879 3.388442
Lev -4.193099 8.386505 -0.50 0.620 -21.1061 12.7199
Tang -28.3464 12.55941 -2.26 0.029 -53.67486 -3.017945
Fag 9.533144 4.08126 2.34 0.024 1.302498 17.76379
div 1.129382 .4874763 2.32 0.025 .1462924 2.112472
_cons -22.06419 15.54764 -1.42 0.163 -53.41899 9.290604
-------------------------------------------------------------------------------------------------------------

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