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Journal of Accounting Advances (J.A.A)
Vol. 5, No. 1, 2013, Ser. 64/3
 
 
Extended Abstract
 
An Analysis of the Effects of Growth Opportunities on Financial Leverage of Companies Listed on Tehran Stock Exchange
 
Dr. S. Samadi                  S. Soheili                   V. Kabiripour
Isfahan University
 
Introduction
The ability of companies in identifying the potential financial sources to provide funds for investments and prepare appropriate financial plans can be considered as a main factor in development and progress. In order to determine the appropriate financial sources, managers should determine the cost of various financing sources and their effects on firm value to maximize the shareholder wealth. In this regard, many factors such as firm size, growth opportunities, management status, exclusive products, production and sales level, resources of raw materials, access to financial markets and the economic and political environment affect decision making. However achieving it, has some costs which can adjust their leverage to optimal leverage. Due to conflicts among interests of different groups of stakeholders (agency theory), these costs may be very expensive and prevent company to achieve this goal. Therefore companies do the partial adjustment to reduce the gap between actual and optimal leverages and these adjustments will be done until the benefits may outweigh the costs.
 
Research Questions or hypotheses
According to various theories of capital structure and the different results obtained by different studies, this paper intends to investigate this question whether there is any non-linear relationship between growth opportunities and financial leverages of listed companies in Tehran stock exchange. It also measures the optimal leverage based on partial adjustment model and the gap between real and optimal leverages. Moreover, it determines firm adjustments toward target leverage and examines the relation between growth opportunities and financial leverage.
 
Methods
The analysis of this paper is carried out common stocks listed on the Tehran Stock Exchange by using the panel data with fix effects at annual level from 2000 to 2011. In this study, for the choice of the method between panel data and pooled data, the F statistic is used. Houseman test statistic was used to detect whether differences between sectional units are fixed or random. The most commonly used tests for the diagnosis of Autocorrelation-Which Durbin-Watson test is the simplest one—to calculate the relationship between an error and its prior.
 
Results
            The results of regression analysis of the first hypothesis indicate a non-linearity relationship between growth opportunities and leverage at 99% confidence level. There is a significant negative relationship between the low levels of growth opportunities and financial leverage calculated by market value. This means that with one unit increase in growth opportunities, other factors being constant, the average 31% reduction in leverage occurs and vice versa.
Also there is a significant positive relationship between moderate levels of growth opportunities and financial leverage calculated by market values​​, This means that with a one unit increase in growth opportunities, other factors being constant, the average 5.6% increase in leverage occurs and vice versa. For high levels of growth opportunities and financial leverage calculated by market value, there is a significant negative relationship. This means if there is a unit increase in the growth opportunities there, with other factors being constant, an average 0.3% reduction in leverage is expected. Meaningfulness of first, second and third power for the growth opportunities with leverage is a cubic relationship;  shifts in the curve was calculated by the software MTLAB using differential. In the low level of growth opportunity, it has a negative slope. Positive slope in the average level of growth opportunities in high-growth opportunities slope is negative again.
 
Discussion and Conclusion
Findings show this relationship is negative for low and high levels of growth opportunities and positive for moderate levels. The optimal leverage based on trade-off theory is estimated by partial adjustment model using variables such as growth opportunities, size, fixed assets, depreciation, research and development costs and profitability. Based on the model outputs, speed of adjustment toward the optimal leverage is 52.7% which indicates a 47.3% gap between the actual and optimal leverages. Accordingly, the second hypothesis regarding to existing a gap between the actual and optimal leverages is confirmed. From an accounting point of view, due to the trade-off theory, growing companies lose more value than normal situation or lack of growth opportunities during the bankruptcy. Also from this perspective, firms with growth opportunities at lower levels due to the lack of appearances in these opportunities (not to be used as collateral) have less leverage. Fama and French (1992) stated that the shares of companies that have high leverage may be discounted by investors with high rates. This implies a negative relationship between growth opportunities and leverage in the low growth opportunities. Long et al (1996) indicate that leverage lowers incentives for investment in weak projects. Varvj et al (2005) examined the relationship between leverage and investment and concluded a meaningfully stronger negative relationship for firms with low growth opportunities to companies that have high growth opportunities. It can be said that when the companies have low growth opportunities, increasing leverage is to increase the speed of corporate bankruptcy because they cannot enhance corporate value through fit investments, and the company is in a critical threshold ​​of declining values, In this regard, in the low levels of growth opportunities for these companies is expected to reduce leverage. This result is consistent with agency theory and trade-off theory. Based on hierarchy theory, which asserts that in firms with investment opportunities that can increase firm value and the benefits of use of debt is more than the cost of debt, it is expected at moderate levels of growth opportunities that leverage is positively associated with. This positive jump in corporate with the middle levels of growth opportunities in use of debts, is consistent with hierarchy theory. Managers have more information than outside investors on cash flow from investment opportunities and generally future prospects and the true value of corporate. If they are not able to increase level of their debt, they cannot use investment opportunities that increase firm value. In other words, increasing the firm's growth opportunities causes more risk, and more financial distress costs are incurred. Firms with high growth opportunities have more incentives to finance their operations through equity, which are expected to be an inverse relationship between growth opportunities and debt existing (Kurdistani and Civil Najafi, 1387).  In high levels of companies' growth opportunities, a negative association can be seen, but this negative correlation is not to the severity level of growth opportunities in lower ones. However, high-growth companies consider reducing leverage. As it can be seen, the first hypothesis that expresses the non-linear relationship between real leverage and growth opportunities is confirmed to be true.
 
Keywords: Growth Opportunities; Partial Adjustment; Optimal Leverage