Theory has clearly made some progress on the subject of capital structure. We now understand the most important departures from the Modigliani and Miller assumptions that make capital structure relevant to a firm’s value. Tax shelters have received recent scrutiny in the financial economics literature because of their impact on firm decisions. However, very little is known about the empirical relevance of the different theories. In this study, we conduct empirical tests for one of the leading theory of capital structure; the trade-off theory. We analyze the relation between the capital structure of a firm and the effect of taxes on business financing decisions in Nigeria. The parameters of debt ratios are estimated by fitting multiple linear regression after this equation- l=f ( τ r, s, v, π, m, c, σ). Our dataset covers a cross-section of 60 quoted firms from Nigerian stock Markets over a ten year period (1996-2005).We report under section 4.1 that the tax benefit of debt approximately equals fifteen (15) percent of firm value. However, this tax advantage does not seem to explain observed debt ratios since we could not obtain a statistically significant coefficient for the marginal tax rate.
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