The Role of Disclosure Quality and Accruals Quality in Reducing the Deviation from the Optimal Capital Structure

Information asymmetry and conflicts of interest between management and shareholders leads to the phenomenon of adverse selection. Adverse selection means choosing the wrong investment choices by investors that leads to non-optimal allocation of capital market resources. In this condition, firms cannot easily finance their investment projects. This object leads the firms’ capital structures to a non-optimized mode. One way to avoid this problem is to increase the accruals quality and disclosure quality because this decreases the information asymmetry. This research investigates the effect of accruals quality and disclosure quality on deviation form the optimal capital structure in 123 firms listed in Tehran Stock Exchange during 2003-2014. The research results show that incearse in accruals quality and disclosure quality decrease the deviation from the optimal capital structure. In addition, the research findings indicate that the effect of accruals quality on deviation from the optimal capital structure in over-leveraged firms is significantly stronger than that in under-leveraged firms.