An Examination on the Effects of Different Financing Methods on the Stock Yield and Price in the Companies Registered in Tehran Stock Exchange

Transcription

1 J. Basc. Appl. Sc. Res., 2(3) , , TextRoad Publcaton ISSN Journal of Basc and Appled Scentfc Research An Examnaton on the Effects of Dfferent Fnancng Methods on the Stock Yeld and Prce n the Companes Regstered n Tehran Stock Exchange Seyyed Nasser Sad 1, Seyyed Had Edrspour 2 1 Assstant Professor, Educatonal Vce Dean of Economcs and Management Faculty of Khoramshahr Marne Scences and tactcs Unversty 2 Senor Expert of Accountng at Islamc Azad Unversty, Emrate Branch ABSTRACT Ths study ams at examnng the mpact of dfferent fnancng methods on the stocks yeld and prce of the companes regstered n Tehran Stock Exchange wthn the years Based on the results acheved by the tests conducted to examne the research models, t s found that retaned-proft fnancng has postvely sgnfcant effect on the stock prce and the mpact of fnancng varable s postvely sgnfcant on the stock prce through equty fnancng. Furthermore, debt fnancng varable s not sgnfcantly effectve on the stock prce. All retaned-proft, equty and debt fnancngs have had postve and sgnfcant effect on the stock yeld. Durbn-Watson tests, F statstcs for the total sgnfcance of regresson models as well as ther determnaton coeffcent are truly ndcatve of the adequate research methods. KEYWORDS: Fnancng, Stock Exchange, Securtes, Stock Yeld, Stock Prce, Retaned Proft, Debt. 1. INTRODUCTION To choose an adequate method s one of the sgnfcant ssues n modern fnancal theory as a matter of prncple whch has not only been proposed wthn the past years but t has been a focus of attenton by the researchers snce a few recent decades. The need to fnance s resulted from the fact that the captal value of the companes s frstly reduced for external factors ncludng exchange rate, nflaton and bank nterest rate. Secondly, operatonal mechansm n the companes wll arouse a feelng of necessty to some funds for purchasng new assets, ncreasng the factory's capacty, employment of new manpower and purchasng raw materals, and such funds are brought up n the form of fnancal resources. The owners of a proft-makng entty are usually encountered wth two knds of rsks ncludng Busness Rsk and Fnancal Rsk. Busness rsk s dependent on the operatonal nature of that proft-makng entty and the Fnancal Rsk depends on ts fnancng methods. Busness rsk s drectly related to an ambguty n connecton wth the power to produce acceptable yeld for long-term nvestments by the entty. To gan acceptable yeld s relevant to the ambgutes n relaton to the demands for the goods produced by the proft-makng entty and ts management capablty to show an accurate reflecton upon unexpected occurrences. Thus, busness rsk s generally related to the ambgutes n long-term proftablty of the proft-makng entty and ts current value at the tme of dssoluton [n case ts operaton s not proftable] (Shabahang, 2003). Makng decsons about fnancng s bascally of great mportance for two groups. The frst group conssts of the managers or drectors of the companes. An access to low-cost, low-rsk and long-term captal resources s a crucal ssue for the companes, because any fundng nvolves n some charges whch should be pad by the company through the returns on ts nvestment, and the non-payment of such funds wll result n serous problems. The second group nvolved n ths ssue ncludes the fnancers and/or the stockholders. Snce ths group s seekng more profts and lower rsks, ths ssue s a matter of great mportance to them. They wsh fnancal decsons to be made n a way to reach an ncrease n the company's proftablty and value. Consequently, the nvestors react to the fnancal decsons of the companes n the shade of whch they may mnmze ther nvestment rsk and maxmze the resulted yeld. Therefore, we can menton three man reasons why the managers are motvated for fnancng ncludng debt rembursement, nvestments n new projects and compensaton of operatonal cash flows (Rchardson, 2008). On the other hand, there has been always a concern among the economsts, nvestors and the companes' managers as to what knd of relatonshp exsts between dfferent fnancng methods and the stock yeld and f we can change the stock value n the market by alterng the captal structure and/or n other words s there any optmum captal structure? Ths study s conducted to examne the relatonshp between dfferent methods of fnancng and the stock yeld and prce of the companes whch are operatng n Tehran Stock Exchange. Indeed, the man research queston s stated as "whch knd of long-term and short-term relatonshps exst between dfferent fnancng methods ncludng retaned-proft, equty and debt fnancng (as the most mportant nternal and external fnancng n the companes) and the stock yeld and prce for the perod n the companes regstered n Tehran Stock Exchange?". Nowadays, the performance of stock exchange n developed countres s used as a crteron for the evaluaton of the polces as well as fnancal, economc and commercal changes n these countres. *Correspondng Author: Seyyed Nasser sad, Assstant Professor, Educatonal Vce Dean of Economcs and Management Faculty of Khoramshahr Marne Scences and tactcs Unversty. E-mal: sadnasser@yahoo.com 3114

2 Sad and Edrspour, 2012 Perseverance of stock exchange n any country s regarded as the contnuance of ts economc development. Stock exchange s consdered as sgnfcant economc elements by whch fnancal facltes are collected and used to realze economc development goals of the countres. As the stock exchange's busness s flourshng and publc nvestment s ncreasng n manufacturng sectors, the condtons necessary to rase employment and producton wll be mproved whle fnancal power of the companes wll also ncreased and the nvestors wll gan a desrable yeld by makng new nvestment and ntatng long-term projects. The decsons about fnancng are orgnally of great mportance for two subgroups of economc enttes. The frst group ncludes the company tself or ts managers and the second one nvolved n ths ssue are fnancers or stockholders. Therefore, an access to low-cost, low-rsk and long-term captal resources s a crucal ssue for the companes, because any fundng requres nvolves n some charges whch should be pad by the company through the returns on ts nvestment and the non-payment of such frms wll result n serous problems. Snce ths group s seekng more profts and lower rsks, ths ssue s a matter of great mportance to them. They wsh fnancal decsons to be made n a way to result n an ncrease n the company's proftablty and value. Consequently, the nvestors react to the fnancal decsons of the companes n the shade of whch they may mnmze ther nvestment rsk and maxmze the resulted yeld. At the most, applcable and practcal purposes of ths nvestgaton are summarzed as follows: To dentfy the methods of short-term and long-term fnancng To evaluate the relatonshp between retaned-proft, equty and debt and the stock yeld and prce for the companes regstered n Tehran Stock Exchange In ths regard Hypotheses are as below: Frst hypotheses: There s a sgnfcant dfferent between shares prce of the companes whch have provded fnancally through shares spread and the companes have used long term facltes. Second hypotheses : There s a sgnfcant dfferent between shares return of the companes whch have provded fnancally through shares spread and the companes have used long term facltes. Thrd hypotheses: There s sgnfcant relaton between shares return and fnancng through debt. Fourth hypothess: There s a sgnfcant relaton between shares prce and fnancng trough accumulated proft. Ffth hypothess: There s a sgnfcant dfferent between shares prce of the companes whch have provded fnancally through shares spread and the companes have used long term facltes Sxth hypothess: There s a sgnfcant relaton between shares prce and fnancng through debt. 2. REVIEW OF LITERATURE Prevous studes have been conducted on the captal structure n dfferent scopes of ths concept whch has resulted n the followng theores n ths respect, all of whch are ndcatve of the sgnfcance of ths subject. Tradtonal Theory: accordng to ths theory, t s beleved that there s an deal captal structure and the company value may be ncreased through makng desrable use of debts (Vafadar, 1999). Captal Structure Theory No Taxes: nvestgatons conducted by Mller and Modglan (MM) n 1958 show that there s no sgnfcant relatonshp between the captal structure and the companes' value. Lack of ncome tax, lack of bankruptcy and agency expenses, exstence of a full contestable market and absence of nformatonal nconsstency, all are the hypotheses proposed by theses two researchers. Wth regard to the fact that such assumptons may not be vsualzed n the real world. Ther theory was fraught wth problems whch resulted n another complementary theory presented by them (Rah Belkau, 1999). Captal Structure Theory and Corporate - Personal Taxes: consderng the tax, MM model may be modfed. The value of the companes wth earnng leverage s defned as the cash flow value of the companes wthout earnng leverage (owners' equty value) besde current value of tax savng n constant cash flow of the company. Not only the company's taxes, but personal taxes are effectve on the company value (lbd). Statc Trade-off Theory: based on ths theory, tax advantage of the debt wll ncrease the value an ndebted company. On the other hand, probable bankruptcy expenses as a result of non-performance of duly debt labltes wll decrease the value of the ndebted company. Hence, captal structure of the company s ndeed as a balance between debt tax advantages and probable bankruptcy expenses resulted by the debt tself. At the most, whle neutralzng each other, these two factors lead to an optmum use of debt n captal structure (Brealey & Myers, 2004). Peckng Order Theory of Fnancng Choce: n ths theory, the companes develop a herarchy whch has been resulted by nconsstent nformaton, n provdng ther requred fnancal resources. Accordngly, the companes prefer nternal fnancng methods over external ones and n case they would requre external fnancng, they wll gve prorty to borrowng rather than ssung shares. Here, no optmzed composton of varous debts and stocks has been already defned and t doesn't exst at all, for there are two knds of possessory rghts ncludng nternal and external. The former s a hgh prorty and the latter, a low prorty. As a result, the debt rato n any company reflects ts cumulatve needs to external fnancng (Brealey & Myers, 2004). 3115

3 J. Basc. Appl. Sc. Res., 2(3) , 2012 Captal Structure Theory and Market's Duly Reflecton: as per ths theory, the economc entty proceeds to ssue shares under crcumstances when stock market value would be hgh compared to ts book value, captal cost would be low and the nvestors would be assured of ncomng proft to the company (Mashayekh & Shahrokh, 2006). Free Cash Flow Hypothess: based on ths hypothess, payment of nterest to the stockholders s a reducng factor to the company free cash flow. Furthermore, snce the nterest and the debt prncple s among the company's permanent commtments and should be duly pad, an ncrease n borrowng wll also cause free cash flow to be decreased. However, t should be notfed that for preventng the managers' personal goals to be realzed, the effect of debt s more than the payment of dvdend, for f the company cannot pay ts debts on due dates, t wll enter nto bankruptcy, whle snce the company has no legal lablty for the payment of dvdend to the stockholders, a decrease or even non-payment of ths dvdend, wll cause fewer problems for the managers. Consequently, t may be concluded that snce the debt wll reduce the opportunty to waste the resources of the company by the managers, fnancng through borrowng (nstead of stocks), wll ncrease the company value (Bagherzadeh, 2003) The most remarkable studes conducted nsde and outsde the country n ths feld are as follows: Bvan & Danbolt (2002) reexamned the fndngs of Rajan and Zngales on the captal structure of busness enttes n England n ther jont nvestgaton under the ttle "captal structure and ts determnng factors n England captal market". They retest the senstvty of explanatory varables studed by Rajan and Zngales to dfferent debt standards and ts consttutve components. The results so acheved show that the fndngs reported by Rajan and Zngales as the results of ther nvestgaton are strongly dependent on the leverage defnton or debt rato. Hadlock and James (2002) started evaluatng the bankng system to regularze fnancng of the companes. They reported that the selecton of the knd of fnancng (captal or debt) wll be bascally made consderng the stock market value of the companes. McNulty et al. (2002) as the nvestgators who found out the sgnfcance of proper assessment of captal cost, noted that f the company makes use of naccurate rates to dscount cash flows, t mght reject a project by mstake and or nvest n a busness whch s not approprate. Lara and Mesquta (2003) examned n an nvestgaton, the relatonshp between the captal structure and the companes' proftablty n Brazl usng mult0varate regresson model. The results acheved by ths study are ndcatve of a drect relatonshp between proftablty and short-term debts and owners' equty and also ts reverse relatonshp wth long-term debts. Namaz and Shrzadeh (2004) nvestgated the effect of captal structure on the proftablty of the companes n dfferent ndustres whch have been regstered n Tehran Stock Exchange. The sample under study conssted of 108 companes from dfferent ndustres. The data related to the average leverage factor and owners' equty wthn a fve-year perod was collected and tested as centralzed and annually. Then, the data about the average leverage factor and return on assets wthn the same fve-year perod was also collected and examned. To test the hypotheses, smple regresson model and correlaton coeffcent was appled. The results shows that n general, there s a postve but statstcally weak relatonshp between the captal structure and the company's proftablty; the relatonshp between the captal structure and proftablty s also dependent on the ndustry and an optmum captal structure can be determned n dfferent ndustres. Darab Baratal (2005) concluded by hs study that there s no correlaton between the captal structure and the company value and all other factors effectve on the company value should be taken nto consderaton to ncrease ths value. Heshmat (2006) was studyng the factors effectve on the changes n earnng leverage of the companes. For ths purpose, he has used the data related to 164 companes regstered n stock exchange wthn the perod The results of ths study ndcates that there s a correlaton between proftablty, fnancal defct, stock yeld and the rato of stock value to book value of the company's assets, and the captal structure (earnng leverage). Aamer (2007) has emphaszed n hs nvestgaton - under the ttle "an examnaton of the factors effectve on the captal structure of the companes regstered n Tehran Stock Exchange" the factors effectve on the captal structure and especally on debts. Ths study was conducted usng the data of the companes regstered n Tehran Stock Exchange wthn the perod and also makng use of the data related to the audted fnancal statements. By ths nvestgaton, he concluded that there s no correlaton between the development opportuntes and short-term debts; however, t s correlated wth long-term debts. A correlaton exsts also between short-term debts and the company's sze, but there d no correlaton between long-term debts and the company's sze. 3. METHODOLOGY In ths nvestgaton, the knd of regresson models estmaton s Ordnary Least Squares (OLS). In case some problems ncludng dfference varance and autocorrelaton of regresson resduals wll be occurred whle mplementng OLS model, Generalzed Least Squares (GLS) wll be appled to modfy ths model. It contans all the features mentoned for OLS model and the only dfference s that t can modfy the autocorrelaton and dssmlarty varance of the resduals by weghng regresson resduals' varance and by dong so, t can mprove the results. 3116

4 3117 Sad and Edrspour, 2012 Consderng ndependent and dependent varables, research models are explaned as follows: R E S D P E 2S 3 D Where E ndcates retaned-proft fnancng, S as equty fnancng, D as debt fnancng, P s the stock prce and R as the stock yeld. The varables are calculated as below: E = (C 1 C 0 ) A S = (C 1 C 0 ) B D t = d t d t-1 In the above equatons, C 0 s ndcatve of captal rate before ts ncrease, C 1 shows the captal rate after ts ncrease, A s the percentage of captal ncrease by recevables and reserves, B s the percentage of captal ncrease by cash captal of the stockholders, d t ndcates debt fnancng n the perod t and d t-1 s debt fnancng wthn the perod t-1. Dependent varables are stock prce and stock yeld. The stock prce means the stock prce at the end of the fscal year (PFY) and the normal return s calculated by the followng equaton: R= Where MV 1 s the company's market value at the end of year, MV 0 s the company's market value at the begnnng of year, P s ndcatve of approved dvdend and B shows the percentage of captal ncrease by cash captal of the stockholders. The companes under study were selected consderng two followng lmtatons: a) The companes whch do not have the data related to the varables used n ths study were left out. b) Some companes whch have been recently regstered n stock exchange and consequently they had not the data related to the past years, have been also left out. Thus, the sample s selected from all the companes actve n Tehran Stock Exchange whch are workng n ndustres other than nvestment, fnancal brokerage and servce ndustres. Industres ncludng nvestment, fnancal brokerage, bankng, credt and servce nsttutons have been omtted from the sample consderng the specfc nature of ther actvtes and for the lack of necessary nformaton to calculate some of the research varables. 4. RESULTS The results of the model estmaton generated by dependent varables of stock prce and yeld are shown n tables (1) and (2). Table (1): the results of estmaton model generated by dependent varable of stock prce varable Varable Coeffcent t Statstcs Sgnfcance Intercept Sgnfcant Retaned-proft Fnancng sgnfcant Equty Fnancng Sgnfcant Debt Fnancng Insgnfcant 2 Adjusted Determnaton Coeffcent 0.05 R D. W F Durbn-Watson Statstcs 1.83 Fsher F statstcs 5.52 Table (2) : the results of estmaton model generated by dependent varable of stock yeld varable Varable Coeffcent t Statstcs Sgnfcance Intercept Sgnfcant Retaned-proft Fnancng sgnfcant Equty Fnancng Sgnfcant Debt Fnancng Insgnfcant 2 Adjusted Determnaton Coeffcent 0.31 R D. W F Durbn-Watson Statstcs 1.43 Fsher F statstcs Takng the resulted so acheved nto consderaton, t s found that ntercept has a postve and sgnfcant effect on the dependent varable. Furthermore, retaned-proft fnancng varable and equty fnancng varable are postvely and sgnfcantly effectve on the stock prce and the mpact of debt fnancng varable on the stock prce s nsgnfcant. Addtonally, Durbn-Watson Statstcs s equal to 1.83 n ths model whch ndcates the lack of an autocorrelaton n the model. F Fsher Statstcs whch s appled to reject smultaneous null hypothess of the coeffcents, s sgnfcant and shows that n ftted model, null hypothess s rejected smultaneously for all

5 J. Basc. Appl. Sc. Res., 2(3) , 2012 coeffcents. Adjusted determnaton coeffcent s 0.05 n the model whch means that explanatory varables are explanng 5 percent of the changes n the dependent varable. Wth regard to the results acheved by estmatng the second model through dependent varable of stock yeld, t s seen that all the varables of the model, have postve and sgnfcant effect on the dependent varable. Also, the effects of ndependent varables ncludng retaned-proft fnancng, equty fnancng and debt fnancng are approxmately equal. Meanwhle, Durbn- Watson statstcs s also equal to 1.43 showng the lack of autocorrelaton n the model. F Fsher Statstcs whch s appled to reject the smultaneous null hypothess of the coeffcents s sgnfcant ndcatng that n a ftted model, null hypothess s smultaneously rejected for all coeffcents. Adjusted determnaton coeffcent s also equal to 0.31 n the model whch means that explanatory varables explan 5 percent of the changes n the ndependent varable and ths model holds more explanatory power than the model wth the ndependent varable of stock prce. Regardng to the nsgnfcant effect of debt fnancng on the dependent varable of stock prce (frst model) and the mpact of all other varables on the stock prce and also consderng the sgnfcant effect of all ndependent varables n the second model on the stock yeld, t may be clamed that all hypotheses except the sxth one are accepted. 5. Concluson In the model wth the dependent varable of stock yeld, all fnancng methods are drectly effectve on the stock yeld; as the companes' captals are ncreased by these methods, ther stock yeld wll be mproved. Thus, t may be concluded that these companes could averagely mprove ther captal structure at a hgher level so that they could ncrease ther returns by ths captal structure and fnancng method. Furthermore, n the model wth the dependent varable of stock prce, t was showed that all fnancng methods except the debt fnancng are postvely effectve on the stock prce. Therefore, t can be summarzed that n case the company's goals are to ncrease the stock prce, t would be better to seek ts fnancng through retaned-proft and equty methods. Thus, t can be stated as further suggeston from later studes that snce two varables ncludng yeld and prce have been appled as dependent varables n ths study, t can be repeated for all other varables. In addton, there was lttle opportunty n the present nvestgaton for studyng the relatonshp between dfferent fnancng methods. Fnally, wth regard to the fact that the varables of ths nvestgaton are consdered for the entre stock exchange market, t can be examned separately n dfferent ndustres. REFERENCES Bagherzadeh, S., (2003). "An explanaton as to the captal structure model n the companes regstered n Tehran Stock Exchange". Fnancal Studes; vol. 16: Bevan, Al., and J., Danbolt (2002). "Captal Structure and Its Determnants n the UK": A Decompostonal Structure. Appled Fnancal Economcs 12. pp Booth, L., V., Avazan and A., Demrguc-kunt (2001). "Captal Structure n Developng Countres". Journal of Fnance 56(1). pp Brealey, R., and M., Stuart (2005). "Fanacal Management (vol. 1) ". Translated and quoted by Saed Bagherzadeh, Tehran, Zarnkoob Pub. Jahankhan, A., and N., Yazdan (1995). "An examnaton on the effect of the companes' ndustry type, sze, busness rsk and operatonal leverage degree on the level of fnancal leverage applcaton n the companes regstered n Tehran Stock Exchange". Management Studes; vol. 17 & 18: Jensen, M., and W., Mecklng (1976). "Theory of the Frm: Manageral Behavor, Agency Costs and Ownershp Structure", Journal of Fnancal Economcs 3. pp Lara, J.E., and J.M.C., Mesquta (2003). "Captal Structure and Proftablty: The Brazlan case", Vancouver: Academy of Busness and Admnstraton Scences Conference, July 11-13, Malekpour, M., (1996). "An analytcal study on the use of fnancal leverage on the proftablty n the companes regstered n Tehran Stock Exchange". MA Thess n Accountng; Shahd Behesht Unversty Mashayekh, M., and S.S., Shahrokh (2006). "The factors effectve on the captal Structure". Accountant; vol. 21, Issue 176: Myers, S., and N.S., Majluf (1984). "Corporate Fnancng and Investment Decsons When Frms Have Informaton That Investors Don't Have", Journal of Fnancal Economcs 13. pp Namaz M., and J., Shrzadeh (2005). "The study on the relatonshp between the captal structure and the proftablty n the companes regstered n Tehran Stock Exchange (emphaszng the knd of ndustry)". Accountng and Audtng Studes; vol. 42: Rajan R.G., and L., Zngales (1995). "What Do We Know about Captal Structure?" Some Evdence from Internatonal Data. Journal of Fnance 50(5). pp

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