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The Impact of Bank Finance on the Performance of Automotive Industry

Author

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  • Dehghan Dehnavi , Mohammad Ali

    () (Assistant Professor of Finance and Banking, Allameh Tabatab'i University)

  • Amiri , Meysam

    () (Assistant Professor of Finance and Banking, Allameh Tabatab'i University)

  • Shokrolah Tabar Aktij, Moazameh

    () (M.A. in Islamic Banking, Allameh Tabatab'i University)

Abstract

The optimal structure of capital and selection of the proper mixture of debt and capital is one of the most important strategic decisions in any firm that deeply affects its performance. Because of dominant role of banks in debt financing for corporates in Iran, this research is focused on the way that the performance of companies in automotive industry can be affected by debt creation via bank finance. The variable of bank finance has been measured with two indexes of ratio of loan to debt and the ratio of loan to equity of firm and variable of firms’ performance also has been measured with two groups of indexes as profitability and stability of profitability. Using the panel data model with the annual data of 26 automobile and auto parts manufacturers during the years of 2001-2014, a variety of models were evaluated. The results of study show that there is not any significant relationship between the loan to debt ratio of company and profitability indexes (except the index of return on equity); but there is a significant and negative relationship between the loan to equity ratio and profitability indexes. Based on the results, lending more to the companies not only do not improve their performance, but also have negative effects when the loan to equity ratio is in high level.

Suggested Citation

  • Dehghan Dehnavi , Mohammad Ali & Amiri , Meysam & Shokrolah Tabar Aktij, Moazameh, 2017. "The Impact of Bank Finance on the Performance of Automotive Industry," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 4(2), pages 27-48, September.
  • Handle: RePEc:ris:qjatoe:0073
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    More about this item

    Keywords

    Debt Leverage; Bank Finance; Automotive industry; Profitability; Stability of profitability;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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