Capital Structure and Political Patronage in Tehran Stock Exchange

Journal of Accounting Advances (J.A.A)
Vol. 2, No. 1, Summer 2010, Ser. 58/3
 
 
Extended Abstract
 
       Capital Structure and Political Patronage in Tehran Stock Exchange
 
 
                  Dr. S.  Khajavi                          S. H. Hosseini
                 Shiraz University                   Islamic Azad University
                                               Scince and Resarch Branch
 
 
Introduction
       One of the important aspects of today emerging markets is paying attention to capital factor and effective methods to value creation and risk management in firms. This requires having a comprehensive knowledge of the position the company in the financial markets and environment impact on the performance of different companies in different industries. Because of different of internal variables in every firm and industry, today credit rating of companies largely depends on their capital structure and the basis of production and services, how to finance and consumption (Myers and Sussman, 2003).
       There is little knowledge about the factors affecting capital structure of the companies that exist in developing economies. Knowledge of factors affecting capital structure in such environments is very important. Utilizing previous empirical researches in Tehran Stock Exchange and their findings could be useful in simulation of effective variables in this regard. In fact, those findings are often the results of implementing financial management theories in our country.
       Iran is one of those countries that the presence of government in various industries is evident and most of these industries are still under the supervision and control of state government financial and operational policies.
       Potential relationship between the government and political patronage and capital structure is very important, though it has not been considered hitherto. Previous empirical studies that help us gain awareness of the components which determination capital structure the companies are mainly based on America, European and other developed countries firms . The first effort in this field investigating the relationship between institutions and capital structure took place by Rajan and Zyngals (1995) followed by other researchers such as Johnson and Mitton (2003); but the same subject has not been studied in Iran.
       Each company's capital structure provides information about the probability of financial distress and in strategic planning, it is needed to determine the factors affecting the efficiency of their financing seriously considered. Various factors such as size, position management, production and sales, sources of raw materials acquisition, access to financing markets, and economic and political environment affect these decisions.
 
Research Hypothesis
       This study also used the results of previous studies on factors affecting capital structure, to investigate the effect of ownership type of company. The results of the action on the issue of environmental research show significant correlation between company capital structure and the type of ownership company (or the political patronage). The main research question in this study is whether there is any relationship between political patronage and the company's capital structure?
In this regard there are several other questions also as below:
• Is there any relationship between company’s capital structure and these variables: size of the company, tangible assets, profitability, and stock market price?
 
Methods
       Firms in the statistical population of this study are the companies accepted in Tehran Stock Exchange. The study period is between the years 1377 to 1386, and 133 companies were investigated. Research method in this study is exploring and determining the relationship between dependent and independent variables by using regression and correlation. In this research, we are investigating presence or absence of relationship between the governmental and political patronage of company and its capital structure. For this purpose, using regression analysis and analysis of panel data, best relationship (if any connection) between dependent and independent variables are estimated. Regression analysis of data and the analysis of panel data collection (year and company) were used for estimating the parameters.
 
Results
       Results indicate significant positive correlation between capital structure and the political patronage, firm size, investment and growth opportunities. In other words, capital structure is under the effect of political patronage in Iran’s environment. Also there is a  negative relationship between capital structure and tangible assets and return of assets.
Obtained results emphasize that there is a lack of sufficient attention to the efficiency of capital resources, and inappropriate increase in volume of liabilities with no regard to its efficiency and capacity of borrowing in firms under political patronage in Iran. This is accordance with the test results done by the Fraser, Zhang, and Derashid (2005) in Malaysia.