The effect of risk management on the speed of adjusting financial leverage in the life cycle stages of companies

Document Type : Research Paper

Authors

1 Assistant Professor, Department of Accounting, Payame Noor University, Tehran Iran.

2 accounting, university of isfahan

3 Master of Accounting, Payam Noor University, Tehran, Iran.

10.22099/jaa.2022.44253.2256

Abstract

Introduction

The speed of adjustment of financial leverage indicates the movement of companies towards the optimal capital structure and clearly shows the financing policies of companies. The importance of optimal leverage is such that the growth and survival of companies depends on this factor and affects the risk and expected returns of companies. One of the ways to reach the optimal leverage level is to reduce the risks faced by the company and consequently increase the company's efficiency. Therefore, the purpose of this study is to investigate the effect of risk management on the speed of adjustment of financial leverage in the life cycle stages of companies.
 

Hypotheses

Company-specific risks and market risks affect companies' achievement of optimal financial leverage, so by managing internal and external risks, the company can achieve optimal leverage sooner. In general, when a company moves from one stage to the next in the stages of the life cycle, the target financial leverage in the next stage is an important factor in determining the current capital structure, and companies should adopt their strategies according to the stages of the life cycle. Based on the stated contents, the research hypotheses are presented as follows:
H1: Risk management has a positive and significant effect on the speed of adjustment of financial leverage.
H2: Risk management during the growth period of companies has a positive and significant effect on the speed of adjustment of financial leverage.
H3: Risk management in the maturity period of companies has a positive and significant effect on the speed of adjustment of financial leverage.
H4: Risk management during the decline period of companies has a positive and significant effect on the speed of adjustment of financial leverage.
 

Method

The current research is applied and from the methodological point of view, correlation is causal type (post-event). The statistical population under investigation in this research is all the companies admitted to the Tehran Stock Exchange and the period under investigation is from 2011 to 2020. In this research, the systematic elimination method was used to reach the sample, and 128 companies were selected as the research sample. Data analysis has been done by using the combined data method and with the data panel approach and by using Eviews 12 software to test the hypotheses.
 

Results

The results of the research showed that risk management has a direct effect on the speed of adjustment of financial leverage. Also, risk management in the growth period of companies has a direct effect on the speed of adjustment of financial leverage with an increasing factor; But in the maturity period, risk management has no effect on the speed of adjustment of financial leverage. Also, risk management in the period of decline of companies with a decreasing and negative coefficient has an inverse effect on the speed of adjustment of financial leverage.
 

Discussion and Conclusion

The financial leverage of the company is affected by the market risks and specific risks of the company, and by fully managing and identifying these risks and using specialized risk management teams and committees, these risks can be minimized so that the company can quickly move towards the optimal leverage and its goal. Risk management during the growth period of companies has the most positive effect on the speed of lever adjustment towards optimal leverage. Among the theories that are related to financial leverage is the theory of the life cycle of companies, and the theme of this theory is that companies always keep resources with different combinations in the stages of the life cycle, and by looking at the methods of financing, they try to parallelize risk, return and goal. They are maximizing the value of the company. In the maturity stage, because the company has a stable situation and with a relative reduction in new investments, the need to finance them has decreased, as a result, they have achieved relative stability in the speed of financial leverage adjustment. Companies in the decline stage have lost their growth value, liquidity indicators are at a minimum and profitability is in a downward trend. At this stage, companies increase the company's risks with large external financing due to the lack of necessary financial resources, and due to the lack of resources to repay debts, the company may face the risk of bankruptcy, and this will slow down the speed of lever adjustment.
 
 
 
 
 

Keywords

References

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History

  • Receive Date: 07 July 2022
  • Revise Date: 16 October 2022
  • Accept Date: 16 October 2022

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