The Effect of Capital Structure on Profit Efficiency of Companies Listed in Automotive and Parts Manufacturing Industry of Tehran Stock Exchange

Document Type : Research Paper

Authors

Persian gulf university

Abstract

The aim of current research is to investigate the possible effect of capital structure on profit efficiency (comprehensive indicator of financial performance). This paper uses the Jensen and Meckling (1976) theory to assess the effect of financial leverage on agency costs and performance. Therefore, this study examines the effect of nonlinear effect of financial leverage on profit efficiency. The sample consists of 28 automotive and parts manufacturing companies listed on the Tehran Stock Exchange for the period of eight years from 1384 to 1391. Data envelopment analysis (DEA) method is used to calculate the profit efficiency and panel data regression is used to test the effect of financial leverage on profit efficiency. The results indicated that financial leverage has a nonlinear (inverted U-Shaped) impact on profit efficiency. Thus, in this industry, financial leverage growth plays a positive role in performance improvement because a reduction in the free cash flow in hands of manager and consequently, decreases agency costs. On the other hand, an increase of bankruptcy risk increases the agency costs of debt and consequently has a negative effect on performance. The findings also revealed that fixed assets have a negative and significant effect on profit efficiency, but firm size, intangible assets and growth ratio don’t have any effect on profit efficiency.

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References

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