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The Relationship between Changes in the Financial Leverage and the Values of the Tehran Listed Firms

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Author Info

  • Darioush Damouri

    ()
    (Yazd University)

  • Jamal Barzegari Khanagha

    ()
    (Yazd University)

  • Mahin Kaffash

    ()
    (Islamic Azad University)

Registered author(s):

    Abstract

    The financial management seeks to maximize the shareholders’ wealth. That is why the financial leverage should be evaluated for its influence on the firm value. The main objective of this paper is to examine the relationship between the changes in the financial leverage, stock returns and firm value. To achieve this goal, the association between the financial leverage and some variables such as stock returns, expected future return, future investment, and future operational performance on the firm value has been tested. In this regard, financial leverage has been evaluated with the two measures of book value or market value. Using the multivariate regressions and the data of 98 selected firms listed on the Tehran Stock Exchange during 2001 to 2010, the relationships between the variables have been analyzed. The findings of the study indicate that the variations in the financial leverage and stock return are positively associated. However, it was found that there is no significant relationship between the changes in the financial leverage and expected future returns. It was also shown that the relationship between the changes in the financial leverage and future investment and future operating performance are different in terms of either market value or book value. Perceiving the type of the relationship between the changes in the financial leverage and assets’ returns might be an indicator to select an optimal compound of debts used as the finance methods which lead to increasing return on assets and finally firm value.

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    Bibliographic Info

    Article provided by Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences in its journal International Journal of Academic Research in Accounting, Finance and Management Sciences.

    Volume (Year): 3 (2013)
    Issue (Month): 3 (July)
    Pages: 198-210

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    Handle: RePEc:hur:ijaraf:v:3:y:2013:i:3:p:198-210

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    Web page: http://hrmars.com/index.php/pages/detail/Accounting-Finance-Journal

    Related research

    Keywords: Changes in the Financial Leverage; Stock Return; Future Expected Return; Future Investment; Future Operational Performance;

    References

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    1. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    3. Maria‐Teresa Marchica & Roberto Mura, 2010. "Financial Flexibility, Investment Ability, and Firm Value: Evidence from Firms with Spare Debt Capacity," Financial Management, Financial Management Association International, vol. 39(4), pages 1339-1365, December.
    4. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
    5. Yaz Gűlnur Muradoğlu & Sheeja Sivaprasad, 2012. "Using Firm‐Level Leverage as an Investment Strategy," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 31(3), pages 260-279, 04.
    6. McConnell, John J. & Servaes, Henri, 1995. "Equity ownership and the two faces of debt," Journal of Financial Economics, Elsevier, vol. 39(1), pages 131-157, September.
    7. Aivazian, Varouj A. & Ge, Ying & Qiu, Jiaping, 2005. "The impact of leverage on firm investment: Canadian evidence," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 277-291, March.
    8. Matjaž Črnigoj & Dušan Mramor, 2009. "Determinants of Capital Structure in Emerging European Economies: Evidence from Slovenian Firms," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 45(1), pages 72-89, January.
    9. Ahn, Seoungpil & Denis, David J. & Denis, Diane K., 2006. "Leverage and investment in diversified firms," Journal of Financial Economics, Elsevier, vol. 79(2), pages 317-337, February.
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