Management Science Letters

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1 Managemen Science Leers 5 (2015) Conens liss available a GrowingScience Managemen Science Leers homepage: The effecs of reurn on invesmen, sales growh rae, volailiy of invesmen, cash flow and srucure of insiuional shareholders on he raio of deb o equiies Jalal Golmohammadi a and Mahboubeh Jafari b* a Maser Suden, Deparmen of Managemen and Accouning, Souh Tehran Branch, Islamic Azad Universiy, Tehran, Iran b Faculy Member, Deparmen of Managemen and Accouning, Souh Branch, Islamic Azad Universiy, Tehran, Iran C H R O N I C L E A B S T R A C T Aricle hisory: Received June 5, 2015 Received in revised forma Augus Acceped November Available online November Keywords: Tehran Sock Exchange Reurn on invesmen Growh rae This paper presens a sudy o measure he effecs of reurn on invesmen, sales growh rae, volailiy invesmen, cash flow and srucure of insiuional shareholders on he raio of deb o equiies. The sudy selecs 102 firms lised on Tehran Sock Exchange and, using regression echnique wih Panel daa, examines five differen hypoheses over he period The resuls indicae ha here was a negaive and meaningful relaionship beween reurn of invesmen and he raio of deb o equiies and a posiive and meaningful relaionship beween sales growh and he raio of deb o equiies. Moreover, here were posiive and meaningful relaionships beween volailiy of invesmen as well as cash flow and he raio of deb o equiies. Finally, he survey has indicaed ha here was a negaive and meaningful relaionship beween he srucure of insiuional shareholders and he raio of deb o equiies Growing Science Ld. All righs reserved. 1. Inroducion One of he mos imporan issues on managemen of firms is o deermine an appropriae mehod for financing aciviies by eiher raising fund direcly from shareholders or borrowing i from financial insiuions (Fazzari e al., 1987; Devereux & Schianarell 1990). The raio of deb o equiies is always an imporan facor for business developmen. A small raio of deb o equiies means he firm has a high risk of financing while a low raio means a low reurn on invesmen (Hoshi e al., 1991). There are many sudies o deermine he effecs of various facors on he raio of deb o equiies. Minon and Schrand (1999) demonsraed ha higher cash flow volailiy could be associaed wih lower average levels of invesmen in capial expendiures, R&D, and adverising. This associaion implies ha companies do no implemen exernal capial markes o cover cash flow shorfalls. Cash flow volailiy in his survey was relaed o higher coss of reaching exernal capial. In addiion, hese higher expenses, as measured by some proxies, indicae a bigger sensiiviy of invesmen o cash flow volailiy. * Corresponding auhor. Tel. : address: majafari22@gmail.com (M. Jafari) 2015 Growing Science Ld. All righs reserved. doi: /j.msl

2 1042 Richardson (2006) invesigaed he exen of company level over-invesmen of free cash flow and repored some resuls, which were consisen wih agency expense descripion, where over-invesmen is associaed wih firms wih high levels of free cash flow. Aig e al. (2012) sudied he relevance of insiuional invesors invesmen horizon and argues ha insiuional invesors wih longer invesmen horizons had bigger incenives and efficiencies o involve in effecive monioring. Wang e al. (2015) invesigaed he impac of company invesmen on sock reurns by implemening daa on he Chinese sock marke. They discovered ha firms wih bigger invesmen experience lower fuure reurns and here was an obvious invesmen impac in he Chinese sock marke. The invesmen impac was appeared o be sronger for companies ha had bigger cash flows, lower deb or for saeowned companies. They also invesigaed he relaionship beween invesmen and reurns and repored ha he high invesmen companies end o earn higher reurns han low invesmen ones before porfolio formaion; however he high invesmen companies earn lower reurns han low invesmen ones afer porfolio formaion. Moreover, he sock reurns may no necessarily change afer invesmen, and he sock reurns may no subsanially correlae wih firm profiabiliy posiively. Davis (2014) considered wheher deb-based capial inflows mainained various impacs on many shorrun macroeconomic indicaors han equiy-based capial inflows. They esimaed he response of domesic variables o an exogenous shock o deb. In heir survey, an exogenous increase in deb inflows leads o a subsanial increase in he oupu gap, inflaion, sock prices and credi growh and an appreciaion of he exchange rae. Pech e al. (2015) proposed a se of mos preferred financial raios from equiy analyss covering Mexican publicly raded companies in Mexico. They repored ha he mos preferred raios by equiy analyss were no acually hose raios basically covered in financial exbooks. Chernykh and Cole (2015) examined he predicive power of several alernaive measures of bank capial adequacy in deermining U.S. bank failures. They repored ha he non-performing asse coverage raio (NPACR) could subsanially ouperforms Basel-based. They saed his measure promise is effecive implemenaion in he promp correcive acions by bank regulaors. Louai e al. (2015) invesigaed he behavior of Islamic and convenional banks in associaion wih he raio of he capial adequacy in various compeiive condiions. They repored ha he funding raio could subsanially influence on he behavior of 70 convenional banks and 47 Islamic banks. Neverheless, compeiive condiions mainained no subsanial impac on he relaionship beween he weighed asses raio and Islamic bank behavior. 2. The proposed sudy This paper presens a sudy o measure he effecs of reurn on invesmen, sales growh rae, volailiy invesmen, cash flow and srucure of insiuional shareholders on he raio of deb o equiies. The sudy randomly selecs 102 firms lised on Tehran Sock Exchange and, using regression echnique wih Panel daa, examines five differen hypoheses over he period In our selecion sraegy, we choose only he acively raded firms whose fiscal calendar fis wih solar year and heir informaion are available. The proposed sudy also do no consider he informaion of holding firms. The proposed sudy considers he following five hypoheses, 1. There is a relaionship beween he reurn of invesmen and he raio of deb o equiies. 2. There is a relaionship beween he sales growh rae and he raio of deb o equiies. 3. There is a relaionship beween he volailiy of invesmen and he raio of deb o equiies. 4. There is a relaionship beween he sandardized cash flow and he raio of deb o equiies.

3 J. Golmohammadi and M. Jafari / Managemen Science Leers 5 (2015) There is a relaionship beween he srucure of insiuional shareholders and he raio of deb o equiies. The proposed sudy of his paper considers he raio of deb o equiies as dependen variable and reurn of invesmen, sales growh rae, volailiy of invesmen, sandardized cash flow and srucure of insiuional shareholders are considered as dependen variables. In addiion, hree variables of cumulaive abnormal reurns, size of firms and oher financial limiaions are conrol variables. The raio of deb o equiies is measured by oal liabiliies divided by oal equiies. Reurn of invesmen is also calculaed as follows, Toal liabiliies ( CK / K). Change in oal asses beween wo consecuive (1) The proposed sudy calculaes change in sales ( y / K ) i, as follows, Sales Sales 1 ( y / K ). Sales 1 The survey considers he following o calculae he change in invesmen Invesmen in curren year - Invesmen in previous year ( VI / K). Invesmen in previous year Sandardized cash flow is also calculaed as follows, (2) (3) ( CF / K) E TACC, (4) TACC TA CASH TL PS (5) where, ( CF / K) represens sandardized cash flow, i E, denoes Ne profi before exraordinary iems, TACC i, represens oal accruals, TA i, shows he growh on oal asses, CASH i,, TL i, and PS i, show changes on available cash, oal liabiliies and purchase on shares of he firms in wo consecuive years, respecively. Finally, he raio of insiuional ownership is follows, shares owned by insiuions ( Lars). (6) oal number of ousanding shres As sae earlier, cumulaive abnormal reurns is a conrol variable, which is calculaed as follows, ( CR / K ) = R R. (7) where he reurn of each firm is calculaed as follows, R = (P P ) + DPS + (P 1000)A + P B P 100 (8) where P i and P i-1 are closing prices for wo consecuive years, DPS represens dividend paid o shareholders, A denoes he raising equiy capial from cash and finally B denoes he raising equiy capial from reained earnings and reserves. In our survey, marke reurns is calculaed as follows, R = TEPIX TEPIX TEPIX 10 (9) where TEPIX is an official index for Tehran Sock Exchange.

4 1044 In our survey, size of he firm ( SFirm, ), as conrol variable, is calculaed by aking naural logarihm on oal asses. Moreover, financial limiaions (WWindex ), also denoed as (Baker & Wurgler, 2007), i ConsF i,, is also calculaed as follows WWindex 0.102ISG 0.091CashFlow 0.035SG 0.062DIVPOS 0.021TLTD where CashFlow is he raio of cash flow, which is calculaed as follows, 0.044Size (10) Ne cash flows from operaing aciviies,. (11) CashFlow i Book value of oal asses In addiion, DIVPOS is a dummy variable, which is one if a firm pays dividend in a year and zero, oherwise. TLTD is he raio of long erm liabiliies on oal asses. Size is he logarihm of oal asses. SG and ISG represen he relaive growh of sales of firms and indusry in wo consecuive years, respecively and finally, ε represens he residuals. The proposed sudy uses he following regression model o examine differen hypoheses of he survey. ( B / k) ( CK / K) ( y / K) ( VI / K) ( CF / K) ( Lars) ( CR / K) SFirm ConsF ε (12) 3. The resuls We firs presen some basic saisics associaed wih he daa gahered in Table 1 as follows, Table 1 The summary of some basic saisics Variable Mean Sd. Dev. Min Max Skewness Kurosis Deb o equiies Reurn on invesmen Growh in sales Volailiy in Invesmen Sandardized cash flow Insiuional ownership Accumulaed abnormal reurn Firm size Financial consrain As we can observe from he resuls of Table 1, he Kurosis saisics mus be less han 3, which means some variables are no normally disribued. In addiion, he implemenaion of Kolmogorov-Smirnov es yields K-S = wih Sig. = 0.027, which also confirms ha he dependen variable is no normally disribued. However, afer normalizing he operaions, we ge K-S = wih Sig. = Moreover, he implemenaion of Pearson correlaion has confirmed ha here was no a srong correlaion among independen variables. Table 2 demonsraes he resuls of he implemenaion of Chow and Hausman ess for Pool/Panel and Fixed effec versus Random effec. Table 2 The summary of Chow and Hausman ess Tes Number Saisics Value df P-value Chow 612 F (502,101) Hausman 612 Chi-Square

5 J. Golmohammadi and M. Jafari / Managemen Science Leers 5 (2015) 1045 According o he resuls of Table 2, fixed effec wih Panel mehod are used for he implemenaion of he regression echnique, which is as follows, ( B/ k) ( CK / K) ( y/ K) ( VI / K) ( CF / K) ( Lars) ( CR / K) SFirm ConsFi, ε -value Sig Rel. (+) (-) (+) (+) (+) (-) meaningless (+) meaningless R 2 = F = (Sig. = 0.000) Durbin-Wason = 2.35 According o he resuls of regression model, F-value is saisically significan, which means he relaionship is linear. In addiion, Durbin-Wason value is wihin desirable level, which means here was no auo-correlaion among residuals. 4. Discussion and conclusion The resuls indicae ha here was a negaive and meaningful relaionship beween reurn of invesmen and he raio of deb o equiies (β = , -value = ), a posiive and meaningful relaionship beween sales growh and he raio of deb o equiies (β = , -value = ). Moreover, here were posiive and meaningful relaionships beween volailiy of invesmen (β = , -value = ) as well as cash flow and he raio of deb o equiies (β = , -value = ). Finally, he survey has indicaed ha here was a negaive and meaningful relaionship beween he srucure of insiuional shareholders and he raio of deb o equiies (β = , -value = ). The resuls of his survey are consisen wih he previous sudies (Guembel & Whie, 2014). For insance, Minon and Schrand (1999) in heir survey discussed ha higher cash flow volailiy could be associaed wih lower average levels of invesmen in capial expendiures, R&D, and adverising. This associaion implies ha companies do no implemen exernal capial markes o cover cash flow shorfalls. Cash flow volailiy in his survey was relaed o higher coss of reaching exernal capial. In addiion, hese higher expenses, as measured by some proxies, indicae a bigger sensiiviy of invesmen o cash flow volailiy. Acknowledgemen The auhors would like o hank he anonymous referees for consrucive commens on earlier version of his paper. References Aig, N., Cleary, S., El Ghoul, S., & Guedham O. (2012). Insiuional invesmen horizon and invesmen cash flow sensiiviy. Journal of Banking & Finance, 36(4), Baker, M., & Wurgler, J. (2007). Invesor senimen in he sock marke. Chernykh, L., & Cole, R. A. (2015). How should we measure bank capial adequacy for riggering Promp Correcive Acion? A (simple) proposal. Journal of Financial Sabiliy, 20, Davis, S. J. (2014). The macroeconomic effecs of deb-and equiy-based capial inflows. Journal of Macroeconomics, 46, Devereux, M., & Schianarell F. (1990). Invesmen, financial facors, and cash flow: Evidence from UK panel daa. In Asymmeric informaion, corporae finance, and invesmen (pp ). Universiy of Chicago Press. Fazzar S., Hubbard, R. G., & Peersen, B. C. (1987). Financing consrains and corporae invesmen (No. w2387). Naional Bureau of Economic Research. Guembel, A., & Whie, L. (2014). Good cop, bad cop: Complemenariies beween deb and equiy in disciplining managemen. Journal of Financial Inermediaion, 23(4), Hosh T., Kashyap, A., & Scharfsein, D. (1991). Corporae srucure, liquidiy, and invesmen: Evidence from Japanese indusrial groups. The Quarerly Journal of Economics, 106(1),

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