Corporate Tax Optimization Effect on Cost of Debt Capital: Evidence of Listed Agricultural Firms in Nigeria

Abstract

This study examined the effect of corporate tax optimization on cost of debt capital among listed agricultural firms in Nigeria from 2015–2024, guided by the Trade-Off Theory. It focused on four key tax optimization variables: statutory tax gap, cash flow tax efficiency, capital intensity tax, and debt tax shield, using an ex post facto design and panel data from four selected firms. The Driscoll–Kray fixed-effects model was applied to ensure robust results in the presence of heteroscedasticity, autocorrelation, and cross-sectional dependence. The findings revealed that statutory tax gap and cash flow tax efficiency both have significant negative effects on cost of debt capital, indicating that firms benefiting from tax incentives and strong cash flow management enjoy lower borrowing costs due to improved liquidity and perceived creditworthiness. In contrast, debt tax shield has a significant positive effect, suggesting that excessive reliance on debt increases perceived financial risk and raises borrowing costs despite tax advantages. Capital intensity tax was found to have no significant effect, implying that asset structure does not strongly influence debt pricing in the Nigerian agricultural sector, likely due to asset illiquidity and sector-specific risks. Based on these results, the study recommends that firms and policymakers prioritize effective tax optimization strategies such as expanding statutory tax benefits and improving cash flow efficiency to reduce debt costs. However, it cautions against overreliance on debt-based tax shields and capital intensity adjustments as strategies for lowering borrowing costs, emphasizing balanced financing structures aligned with lender risk perceptions.