Investigating the impact of inflexibility of costs and capital structure in Tehran Stock Exchange

Dissertation for Master's Degree in Accounting

Abstract

By choosing the amount of debt (especially long-term debt) in their asset portfolio, financial managers of companies not only affect the performance of their company internally, but this ratio (which is called capital structure or, with a little tolerance, financial leverage or financial structure) is also effective on investors outside the company. In fact, the choice of capital structure affects the value of the company and the financial risk of the company in two ways. On the one hand, the amount of long-term loans or debts in a company's asset portfolio can turn into good profit opportunities for the company, especially in situations where the loan is provided at a low cost. According to the results obtained from the first and second hypothesis tests, it can be concluded that the inflexibility of costs has been able to affect the capital structure of companies. What is important is the effect of cost inflexibility on financial leverage based on book prices more than financial leverage based on market prices. This discussion is in line with the results of studies of foreign countries (Klara and others 2008[1]) and indirectly confirms the results of Kurdestani and Mortazavi's research (2013). Regarding the third and fourth hypothesis, considering that the independent variable (company size) can affect financing methods, this relationship (there is a significant relationship between company size and financial leverage based on book value) can be guessed in advance. Based on the theoretical foundations, it is the size of the company that can affect the ability to build trust. Finally, the capital structure will be affected by several variables such as the size of the company. According to the results of the third and fourth hypothesis test, this financial leverage is based on the book value, which has been able to have a stronger relationship with the size of the company. In simpler words, this financial leverage is based on book value, which can be more affected by the size of the company. These results are in line with similar domestic (Sinai, Rezaian, 2011) and foreign (Rajan and Zingles (1995) and Boon and Danbolt (2000)) researches.  Regarding the results of the fifth and sixth hypotheses, when the independent variable (profitability) is in the field of profit and income and the dependent variable is in the field of capital and financing, if the measure of capital structure is financial leverage, it is expected that the opposite relationship will be observed. The obtained results also show that the capital structure when evaluated by debts, the profitability of the company shows the opposite relationship with this.

1-1- Introduction

The rapid and tremendous progress of technology, along with the increasing competition in global markets, encourages the managers of economic units to produce high quality products, provide good services to customers and finally reduce the cost of goods and services. The source of wealth creation of economic enterprises and organizations are customers, and only satisfied and satisfied customers remain loyal and continue to create wealth in organizations in a sustainable manner. Customer satisfaction also depends on how much we provide valuable and quality products and services at the right price and at the right time compared to our competitors. "Cost management" is a concept that greatly fulfills the above goal. Cost management is an improvement philosophy because it tries to find appropriate ways to make decisions that involve creating value for customers, along with reducing costs. 

In order to reduce costs, it is important and necessary to know the behavior of costs. In other words, knowing how costs behave in relation to changes in the level of activity or the level of sales is important information for managers to make decisions regarding planning and budgeting, product pricing, determining the break-even point and other management matters. In traditional models of cost behavior in management accounting, variable costs increase or decrease proportionally to changes in activity volume. This means that the magnitude of changes in costs depends only on the magnitude of changes in the volume of activity and the direction of changes (increase or decrease) in the volume of activity has no effect on the magnitude of changes in costs. But the research results of some researchers in recent years indicate that the amount of increase in costs when the level of activity increases is more than the amount of decrease in costs when the volume of activity decreases.(Namazi and Dawnipour, 1389, 86).

Economic institutions and enterprises, especially those active in the industrial sector, need large capitals for the continuation of their life and production activities as well as the development of activities (Abrazi et al., 1384, 74). In this sense, decisions related to financing are one of the most important decisions that happen in any company. (Tetiman, 1998, 25)

1-2- Explaining and stating the issue

One of the most important components of any economic activity is providing the required financial resources. All companies need capital to start and continue their activities. This capital, which appears in the form of shares or debt in the conventional structure of companies, can be obtained from various sources and is one of the indicators that can be effective in the attitude of new investors towards the company. Companies can provide the required financial resources from equity or debt, but the important thing is that these resources should be selected and used in a way that makes the company profitable. The combination of debt and equity is called capital structure. Minimizing the capital cost of any company means maximizing the company's return; In other words, following the reduction of capital cost, the value of the company increases, which also leads to an increase in equity. Therefore, a significant part of the accuracy of managers is spent on determining the combination of the capital structure that is optimal (Nuchian, Kerami, 2010, 2).

In examining the capital structure of companies, an attempt is made to explain the combination of different financial resources used by them in financing the required activities and investments. It can also be said that the purpose of determining the capital structure is to determine the composition of the financial resources of each company in order to maximize the wealth of its shareholders, because since the company's capital cost is considered a function of its capital structure, choosing the optimal capital structure will reduce the company's capital cost and increase its market value (Khalghi Moghadam and Baghomian, 1385, 59). It has been the focus of attention of many financial economists for a long time and is still the source of many debates. Of course, at one time it was believed that the nature of such issues is so complex that it is not possible to formulate a reasonable theory in this field. About half a century ago, Weston (1955) opened the door to the discussion about the possibility of formulating such theories, and the continuation of such discussions eventually led Modigliani and Miller to formulate the first theory of capital structure. Studies show that, since the publication of their article, various theories and models have been formulated about the capital structure of companies and how to choose it. However, studies show that none of the current theories and models alone can fully explain the effective factors in determining the capital structure of companies, and they do not provide a decisive answer to the following question: Why, in different circumstances, a number of companies choose to publish to finance their activities. Stocks, some use internal sources and others choose the borrowing method. On the other hand, identifying the optimal financial structure in order to reduce costs and consequently increase the value of companies is important and worthy of attention. In simpler terms, the capital structure can be used as an expression to maximize value, and to achieve this goal, it is necessary to identify the factors influencing its structure. In the past, efforts have been made in Iran and outside of Iran in this regard. For example, Yahiizadeh Far et al. and its impact on the financial structure. One of the basic assumptions of management accounting indicates that changes in costs have proportional relationships with the increase and decrease in the level of activity. But recently, this assumption has been discussed by Anderson and his colleagues (Namazi and Devani 2019, 73).

Recent studies on cost behavior indicate that the amount of cost reduction when sales decrease is less than the amount of cost increase when the same amount of sales increases (Kordestani and Mortazavi 2011, 19). And the intensity of these changes can also be different from one company to another. In other words, companies' costs can have different variability.