THE STUDY OF RELATIONSHIP BETWEEN CAPITAL STRUCTURE, FIRM GROWTH WITH FINANCIAL LEVERE OF THE COMPANY LISTED IN TEHRAN STOCK EXCHANGE Fatemeh Arasteh Department of Aounting, Siene and Researh Branh, Islami Azad University, Guilan, Iran (Corresponding Author) Mohsen Mohammad Nourbakhsh Department of Management, Islami Azad University, Rasht Branh, Rasht, Iran Abstrat: One of the most important issues that finanial managers must onsider in order to maximize shareholders wealth is to determine the best ombination of ompany resoures or the apital struture. The apital struture puzzle is one of the most important issues in the finanial management and it is even more ompliated than the dividend puzzle. The disussion of apital struture refers to the method of ombination of ompanies finaning soures, inluding debts, preferred stok and ommon stok. In this researh, the relationship between the ownership struture, orporate growth with orporate finanial leverage is addressed in ompanies being aepted in Tehran Stok Exhange using deduted simultaneous equation systems and panel data relating to 2007 2011. Generally, researh findings indiate a relationship between the ownership struture, orporate growth and ompanies administrative finanial leverage. Keywords: Capital Struture, Firm Growth, Finanial Leverage INTROUCTION The ombination of shareholders or the ownership struture is one of the important issues in the orporate governane whih affets managers motivation and onsequently,an signifiantly affet eah ompany s effiieny. In the past, eonomists assumed that all groups relating to a stok ompany operated for a ommon purpose, but during the last three deades, many onflits of interest among groups and the methods of ompanies onfrontation with these onflits were mentioned by eonomists. These issues are totally alled the ageny theory. Deision making on the ownership struture whih means the orporate finaning affets the orporate value like other deisions of managers. Managers as shareholders representatives regulate the ompany s apital struture in order to have a positive effet on the proess of orporate value s inrease whih is the inrease of shareholders wealth. Therefore, the determination of an optimal apital struture and finaning in ompanies are signifiantly important. For this purpose, managers must be ompletely aware of the effet of variables whih an affet the ompany s apital struture in order to take informed ations resulting from sientifi theories with a proper motivation to ahieve an optimal apital struture. On the other hand, the main issues mentioned in eah approah and theory of apital struture fous on variables and internal fators of ompanies suh as the method of management, shareholders ombination, aounting variables, and other issues. In these approahes, ompanies external effetive fators are less foused. The most important fators inlude the type of ativity, soial and politial issues and some maroeonomi variables. 1
Now, the researh question is that whether there is signifiant relationship between the ownership struture, orporate growth, and finanial leverage of ompanies being aepted in Tehran Stok Exhange? Researh Literature. Najjar and Tyler (2008) studied the relationship between the ownership struture and apital struture for ompanies being aepted in Tehran Stok Exhange. Their researh results indiate that there is no signifiant negative relationship between the apital struture and institutional investors. They suggested that a mehanism for the external ontrol whih affets the orporate governane is the emergene of institutional investors as apital owners. Institutional investors supervise the ompany impliitly through data olletion and management deisions priing and expliitly through the ontrol of ompany s performane. Hassan et al. (2009) also showed that the size the board of diretors and institutional shareholders had a signifiant negative relationship with debt equity ratio. Larry (2010) studied the relationship between the ownership struture and the type of ompany s partiipation with apital struture. This study was onduted in China during 2000 to 2006 using panel data and multivariate regression with the sample size of 789 ompanies. The result of this study indiates the less use of finaning through debts in ompanies in whih governane system mehanisms are implemented at a high level. In addition, the type of industry in whih the ompany partiipates has positive effets on the apital struture following the ownership struture and orporate governane mehanisms. Zhao et al. (2011) attempt to expand the knowledge of finanial leverage, orporate growth and finanial strength of ompanies being aepted in Sri Lanka stok exhange during 2000 to 2009 in an artile. The key researh question is that whether the effet of finanial leverage on the orporate growth is positive or negative. Results indiate that there is a positive relationship between the finanial leverage, and the orporate growth and finanial strength. In addition, it reflets the view that there is a positive relationship between the finanial leverage and other growth variables whih have shown that the future growth of the ompany was negative. Al Ali(2009) studied the relationship between the apital struture and ownership struture, and determined some features whih affeted the apital struture. The result shows a signifiant relationship between the apital struture and ownership struture.. Hashemi and Bekrani (2011).studied the relationship between the apital struture deisions, and ownership struture and orporate governane system. Results of data analysis verified hypotheses of the study and finally, the main hypothesis of the study was verified using ombined data. In other words, there is a signifiant relationship between the orporate apital struture deisions, and the ownership struture and the orporate governane system. Asadi et al. (2011). studied the relationship between the apital struture and the ownership struture in ompanies being aepted in Tehran Stok Exhange. In order to test the hypothesis using the panel data statistial method, it was attempted to provide four patterns based on variables. The empirial evidene indiates that there is a signifiant negative relationship between the apital struture and the ownership one. Aording to results, although it is not lear that whether the apital struture leads to the ownership struture or vie versa, it seems that investors and reditors must onsider the apital struture and or the ownership struture at the time of deision making on the investment and areditation. Sadeghi et al.(2012). studied the relationship between the ownership struture and the performane of ompanies being aepted in Tehran Stok Exhange using deduted simultaneous equation systems and panel data relating to 2003 2009, and researh hypotheses test indiates that in Tehran Stok Exhange, fous and ownership struture do not affet the performane of ompanies being aepted in 2
Tehran Stok Exhange, but the orporate performane has a signifiant effet on the ownership struture. The Main Hypothesis There is a signifiant relationship between the ownership struture, orporate growth with orporate finanial leverage. Sub Hypotheses 1. There is a negative relationship between institutional ownership and orporate finanial leverage. 2. There is a positive relationship between profit growth and orporate finanial leverage. 3. There is a negative relationship between Sales growth and orporate finanial leverage. 4. There is a positive relationship between Asset growth and orporate finanial leverage. Method of Data Colletion Researh Method: This researh is indutive, quantitative, field, applied and quasi experimental, and is onduted using ex post fato (through past information). Statistial Population and Sample, and Data Colletion: In order to ondut the study, all ompanies being aepted in Tehran Stok Exhange were onsidered as the statistial population whih inluded 463 ompanies until the end of 2011, and the statistial sample was extrated from among these ompanies. In this researh, the statistial population onsists of ompanies whih have the following features: 1. The ompany s stok should be transated in Tehran Stok Exhange from 2007 to 2011 (5 years) and it should have a ontinuous ativity. 2. The ompany should not have any hange in the ativity during the mentioned fisal years or should not have any hange in the fisal year. 3. The ompany should not be a part of banks or finanial institutions (investment ompanies, finanial intermediary, holding ompanies, leasing). (Elimination due to the speifi nature of the ativity and return of investment ompanies is also imposed in other subgroup ompanies). 4. The fisal year of all ompanies should be on Marh 20. 5. The ompany should not have operating loss during these years and onsequently, the dividend should be distributed in ash. 6. The required data should be available. 7. Finally, aording to the aforementioned features, 140 ompanies were seleted for the researh during 2007 to 2011. 140 ompanies whih were the members of population were seleted as the sample. Desriptive Statistis: Features relating to variables used in the researh, inluding dependent variables were presented separately. Statistis for the variables used in the researh inlude mean, median, maximum, minimum, standard deviation, skewness, and Jarque Bera test. Beause of the differene between mean and median in some data and due to signifiane (probability) level of less than 5% in Jarque Bera test for variables, there is a need for the adjustment and normalization of data. As some variables were normal, by using Johnson s data onvert Minitab software, the above variables were normalized with the probability level of more than 5% and the slight differene between the mean and median showed the normalization of observations. 3
Table 1: Desriptive Statistis LEV_BV LEV_MV LN_IO PIO Mean 1.104744 5.700615-0.500275 18.15854-1.091937-0.020972 8824 Median 1.094174 5.700622-0.490670 18.05331-1.066275-0.010922 0.022479 Maximum 1.698932 5.701635 0.742907 21.77518 2.426947 2.585380 2.381193 Minimum 0.522046 5.699731-1.092912 14.01861-3.929880-2.675700-2.425800 Std. Dev. 0.211252 0383 0.260056 1.368543 1.193756 0.958630 0.987543 Skewness 0.054409-1047 1.56E-06 0.072302 2130-0.018502 9759 Kurtosis 3.181868 2.654489 2.948714 3.071314 3.305916 2.933777 2.629841 Jarque-Bera 1.310088 3.481985 0.076715 0.733299 1.478142 0.167847 3.996007 Probability 0.519419 0.175346 0.962369 0.693052 0.477557 0.919502 0.135606 Sum 773.3205 3990.431-350.1925 12293.33-413.8440-14.68045 6.158880 Sum Sq. Dev. 31.19470 0103 47.27284 1266.087 538.6704 642.3613 679.7438 Observations 700 700 700 700 700 700 700 Mana (inertial) Test of Data: Im pesaran and Shin s test is used for Mana test; so, in order to have Mana data, Dikey-Fuller absolute value should be more than the ritial value and if it is not Mana, the first data differene is used. The test results are presented in the following table. Results show that data are Mana. Table 2: Mana (inertial) Test of Data Im-Pesaran-Shin unit-root test Ho: All panels ontain unit roots Ha: Some panels are stationary Augmented Dikey-Fuller test statisti t-statisti ADF 2.30-2.28-2.30-2.40-2.29-2.20-2.74 Fixed-N exat ritial values 10% 5% 1% LEV_BV LEV_MV LN_IO PIO The Correlation Test: Aording to the above hypotheses, the orrelation oeffiient alulations are done two by two for the researh variables in the following table, and as it is observed, there is a negative relationship between the finanial leverage, and institutional ownership and other explanatory variables, and the perent of the relationship with the sales growth is more than other variables. The market finanial leverage has also a negative relationship with institutional ownership and other variables, and the perent of the 4
relationship with the sales growth is more than other variables. In addition, the market leverage has a diret relationship with the natural logarithm of the number of shares. Consequently, through the linear regression analysis ad test based on the suggested models, we estimate and analyze oeffiients. Table 3: The Correlation Test: LEV_BV LEV_MV LN_IO PIO LEV_BV 1.000000 0.716064-0.050231-0.085469-0.031616-0.082697-0.159471 LEV_MV 0.716064 1.000000 2918-0.148073-7628 -0.191754-0.273318 LN_IO -0.050231 2918 1.000000 0.039443-0.020769 0.150252 0.077660 PIO -0.085469-0.148073 0.039443 1.000000-0.033640-0.065231 0.032194-0.031616-7628 -0.020769-0.033640 1.000000 0.068821 0.227146-0.082697-0.191754 0.150252-0.065231 0.068821 1.000000 0.200939-0.159471-0.273318 0.077660 0.032194 0.227146 0.200939 1.000000 Test models: The first model: LEV it= α 0 + β 1 IO it +β 2 PIO it +β 3 it +β 4 it +β 5 it + e it The seond model: IO it = α 0 + β 1 LEV it +β 2 it +β 3 it +β 4 it + e it The third model: LEV it= α 0 + +β 1 it +β 2 it +β 3 it + e it The fourth model: IO it = α 0 +β 1 it +β 2 it +β 3 it + e it 1. Finanial Leverage: Leverage is the existene of fixed osts in the list of the ompany s expenses. The finanial leverage is alulated through the total debts divided by the total assets. In this researh, the finanial leverage is used in two ways: 1. Total debts divided by the book value of assets 2. Total debts divided by the market value of assets The Ownership Struture: The ownership struture means that whih (natural/legal) persons have influene and domination on the operational and strategi deisions of a ompany. Two indies are onsidered for the ownership struture: The first one is the natural logarithm of the number of shares for institutional investors, and the seond one is the institutional ownership perent from shares whih is obtained by the number of shares for institutional investors divided by the total shares of the ompany (Asadi et al., 2011). 5
2. The Corporate Growth: Growth is defined as a hange in the annual perent of total assets, sales and profit. The orporate growth shows an expansion in the ompany s ativities in terms of sales, profits and assets (Zhao, et al, 2012). (seleted year value ( total asset.profit. sale) - Based year value (total asset. profit. sales) ) / Based year value (total asets. profit.sales) Endogenous variables: LEV,IO Exogenous variables:,,, Results of diagnosti tests indiate that the models used are of the type of fixed effets. Aording to the diagnosti tests, we use the fixed effets model to estimate the model oeffiients and also, beause patterns are preise and the number of instrumental variables is more than endogenous variables, the two-stage least squares method is used. In order to test patterns, in the first stage, the redued patterns, the third and fourth equations are separately estimated through the least squares method, and in the seond stage, the first and seond equations are fitted. Before the estimation of the first and seond patterns, the following variables were estimated instead of endogenous variables (LEV & IO) aording to the residual of the third and fourth equations and they were used as explanatory variables. IOHAT = IO RESID 3 LEVHAT = LEV RESID 4 RESID 3 :The remaining third model RESID 4 : The remaining four models Autoorrelation Test: Aording to results of Durbin-Watson test, in all patterns, there is the probability of autoorrelation. Based on the type of data (panel data), Volderij test (autoorrelation test) is onduted for the above four patterns. H0: There is a orrelation H1: There is no orrelation Aording to the probability level, there is autoorrelation in less than 5% of most patterns. Therefore, due to the autoorrelation, the FGLS method is used to estimate the autoorrelation ondition through Stata software and their oeffiients are obtained. The First Stage Tests (FGLS): Patterns of Deduted Equations: Patterns of deduted equations show the diret and indiret effets of variables. Table 4: The third model - Marke leverage LEV it= α 0 +β 3 it +β 4 it +β 5 it + β 6 Z it + e it Statistis -11.78 Std. Dev. -.020 Coeffiient -.26-5.52 -.025 -.14 0.017 2.29 -.004.011-12.29 -.0052 -.069 Wald hi2(4) = 252.28 Prob > hi2 = 00 The third model- Book leverage LEV it= α 0 +β 3 it +β 4 it +β 5 it + β 6 Z it + e it Statistis Std. Dev. 6 Coeffiient
2.4.00016 5.70-8.46 8.72 -.00007 0.57.57 7.45 4.22-7.94 5.81 -.0004 Wald hi2(4) = 248.22 Prob > hi2 = 00 The fourth model IO it = α 0 +β 2 it +β 3 it +β 4 it +β 5 Z it + e it Statistis Std. Dev. Coeffiient 0 0 2 0.66 104.57 4.12-4.04.44.16.14.017.022 17.29.61 -.052.014 Wald hi2(4) = 26.69 Prob > hi2 = 00 Seond test: ) FGLS( Table 5: The first model - Market leverage LEV it= α 0 + β 1 IO it +β 2 PIO it +β 3 it +β 4 it +β 5 it + β 6 Z it + e it Statistis Std. Dev. Coeffiient -12.25.00 -.49 5.72 -.0014 -.0085-6.14 -.007 -.042-8.79 -.018 -.162 2 2.98 -.004.0125-15.90 -.004 -.062 Wald hi2(6) = 2186.96 Prob > hi2 = 00 IOHAT PIO The first model- Book leverage LEV it = α 0 + β 1 Io it +β 2 PIO it +β 3 it +β 4 it +β 5 it +β 6 Z it + e it 0 2 0.298 0 0.782 1 Statistis 4.4-2.15-1.04-12.62 -.28-2.26 Std. Dev..00012 7.16 8.75 5.68 7.10 9.00 Coeffiient 5.70 -.00002-9.11 -.000071-1.96 -.00002 IOHAT PIO Wald hi2(6) = 2856.71 Prob > hi2 = 00 7
ا- The seond model- Marke leverage IO it = α0 + β 1 LEV it +β 2 it +β 3 it +β 4 it +β 5 Z it + e it Statistis Std. Dev. Coeffiient 0.101 1.64 554.218 908.04 0.108-1.61 97.218-156.21 0 4.01.146.587 2-2.12.0182 -.056 0.912.11.024.002 Wald hi2(5) = 21.41 Prob > hi2 = 00 The seond model Book leverage IO it = α 0 + β 1 LEV it +β 2 it +β 3 it +β 4 it + β 5 Z it + e it Statistis Std. Dev. Coeffiient 0 102.51.167 17.28 0 2.59.092.222 0 4.72.149.704 0-2.60.017 -.062 0.176 1.25.022.044 Wald hi2(5) = 41.05 Prob > hi2 = 00 LEV_MVHAT LEV_BVHAT Aording to results of the first and seond patterns hypotheses test whih was onduted based on the existene of autoorrelation, the regressions model is verified at the onfidene level of 95%. Researh Conlusion and Suggestions: Identifiation of the apital struture of ompanies in the stok exhange is very important whih from different ators points of view, the stok market is used in many different ways. As it was mentioned in the researh objetives and as it was verified in the analyses, the apital struture is influened by the growth (sale, profit and asset). 1. The researh suggestion is based on the result of the first sub-hypothesis and the negative relationship between the institutional owners and the finanial leverage. Aording to these results, ompanies owned by institutional investors tend to use less finanial leverage beause this high finanial leverage shows finanial risks. It is suggested that investors invest where institutional owners are high beause high institutional owners lead to the less finanial leverage. These findings an be optimally used in deision makings. 2. Aording to results of the seond sub-hypothesis and the negative relationship between the profit growth and the administrative finanial leverage, it is suggested that ompanies with a high profit growth redue the utilization of the finanial leverage in their finaning, and investors invest in ompanies with a higher profit growth beause there is a lower finanial leverage and also lower risks and bankrupty. 3. Aording to the third sub-hypothesis and the negative relationship between the sales growth and the finanial leverage, it is suggested that ompanies with a high sales growth redue the utilization of the finanial leverage in their finaning. 4. Aording to the results of the fourth sub-hypothesis and the negative relationship between the asset growth and finanial leverage, it is suggested that ompanies with a higher asset growth redue the utilization of the finanial leverage in their finaning. Beause more risk is assoiated with higher finanial leverage. Suggestion for Future Researh. 8
1. In addition, in this researh, it is not lear that whih variables ause others; so, it is suggested that in a separate researh, it beomes lear that for investment or areditation deisions, whih one is onsidered to be the ausative agent for the other. 2. Beause of the differene among results of hypotheses test, the administrative finanial leverage and the market finanial leverage, it is suggested that more researhes must be onduted in order to study these instrumental variables simultaneously. 3. As the ownership struture has different indies, inluding institutional ownership, managerial ownership, orporate ownership, et., in this researh, we only used the institutional ownership as the index of the ownership struture based on the researh of Najjar and Tyler. It is suggested that in another researh, other indies of the ownership struture are used. 4. The effet of industry and maro-eonomi and politial variables an be entered into the pattern, and studied and analyzed. 5. Study of the finanial leverage of small ompanies and its effet on the ompanies growth Referenes 1) Assadi. Gh,Mohammadi.Sh, Khoram.A (2011) The relationship between apital struture and ownership struture. Journal of Aounting. Vol4, PP 29-48. 2) Al ali.e (2009) The relationship between apital struture and ownership struture of listed ompanies in Tehran Stok Exhange, The end MS, University of Mobarakeh. 3) Hassan A.S, Butt.A (2009) Impat of Ownership Struture and Corporate Governane on Capital Struture of Pakistani Listed ompanies, International Journal of Business and Management,Vol,4,pp50-57. 4) Hashemi,E, Bekrani,K (2011) The impat of ownership struture and orporate governane on apital struture deisions of the ompanies listed in Tehran Stok Exhange. Journal of Finanial Aounting, Vol3,PP.1-18. 5) Lary D.Su (2010) Ownership Struture, orporate diversifiation and apital struture of firms, Management Deision, Vol.48, No.2,PP :314-339. 6) Najjar.B, Taylor.P (2008) The Relationship between Capital Struture and Ownership Struture, Managerial Finane,Vol.12, pp:919-993. 7) Sadeghi.H,Rahimi,P (2012)The relationship between ownership struture and performane of the listed ompanies, using a system of simultaneous equations, Finanial Aounting Journal,Vol.4, PP.89-102. 8) Zhao,B. W.P Wijewardana.(2012) Finanial Leverage, Firm growth and Finanial strength in the listed ompanies in Sri Lanka, soial and Behavioral Sienes, Vol.40, pp: 709-715. 9