Agency Theory, Capital Structure and Firm Performance in Tehran Stock Exchange

Agency conflict has been recognized as one of the determinants of capital structure of firms based on the agency theory. Financing decisions have been recognized as one of the strategic decisions in the firms that are affected by firm’s governance. The purpose of this paper is to empirically investigate the impact of capital structure choice on firm performance in Tehran stock exchange. Fixed effect panel regression model is used to analyze eight years of data (1385-1392) on 158 listed firms, to find the relation between leverage and firm performance after controlling for factors such as size, age, tangibility, growth, liquidity and advertising. In order to analyze the relation between leverage and firm performance, we considered two assumptions: negative relation between long term and short term debt ratio with return on equity (ROE) /return on assets (ROA). Empirical results suggest that leverage has a negative influence on financial performance of Iranian firms, which is in contrast with the assumptions of agency theory as commonly received and accepted in other developed as well as emerging economies. Consequently, postulates of agency theory have to be seen with different perspective in Iran given the underdeveloped nature of bond markets and dominance of state-owned banks in lending to corporate sector.