A Decompositional Analysis of Capital Structure and Its Determinants: Evidences from Tehran Securities Exchange

Empirical studies of capital structure are fraught with difficulties. As mentioned by Harris and Raviv (1991), the interpretation of results of these studies should consider the difficulties involved in measuring both leverage and the explanatory variables. In other words, resulting from empirical studies of capital structure is "definitional-dependent of leverage" and on the other hand, may be affected by the imperfect measurement of the study made by researcher. In this study, ten measures have been used to define financial leverage for the first time (in Iran). The results show firstly, some firm characteristics are associated with financial leverage. Level of leverage is negatively correlated with profitability and growth opportunities, and positively related to size variable, but tangibility is not related to leverage; secondly, the results are affected by definition of leverage. In other words, the results of the first part are affected by ten measures of financial leverage measurement. Especially, the decompositional analysis shows current debt and its components have an important effect on the results of the study. This finding challenges traditional measurements of leverage.