The Effect of Investors' Divergence of Opinions on the Speed of Adjusting the Financial Leverage Towards the Optimal Leverage

Document Type : Research Paper

Authors

1 Professor of Accounting, Ferdowsi University of Mashhad, Mashhad, Iran

2 Assistant Professor, Department of Accounting, Payame Noor University, Tehran Iran

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

10.22099/jaa.2023.46960.2312

Abstract

1-Introduction
The speed of adjustment of financial leverage indicates the movement of companies towards the optimal capital structure. The importance of optimal leverage is such that the growth and survival of companies depends on this factor. In general, the capital structure reflects optimal debt and equity and is the most important issue in corporate finance. The capital structure is the core of the company's finances, because it affects its profitability, risks and value. By accepting the two levels of real and optimal leverage, it should be accepted that there are factors that influence the company to reach that optimal level of financial leverage. One of the factors affecting the speed of adjustment of financial leverage towards the target lever is stock pricing in the capital market; incorrect pricing can affect the speed of adjustment of leverage towards the optimal lever. On the other hand, stock pricing itself will be influenced by factors in the capital market, including the opinions of investors. The behavior and opinions of investors are the most obvious factors that determine the price of assets and stocks, especially in emerging markets.
 
2-Hypotheses
The speed of adjustment of financial leverage depends on various factors. The theory of equilibrium and market positioning is expressed in such a way that adjusting the leverage towards the optimal leverage requires reducing the debt or increasing the stock price, and when the stock price is priced higher or lower than its intrinsic value, adjusting the leverage towards Optimum leverage is easier, this is important in companies with high leverage and low financial leverage. Therefore, according to this theory, it is clear that one of the factors affecting the speed of adjustment of financial leverage towards the target lever is stock pricing in the capital market, and incorrect pricing can affect the speed of adjustment of leverage towards the optimal lever. On the other hand, stock pricing itself will be influenced by factors in the capital market, including the opinions of investors. Investors' behavior and opinions are the most obvious determinants of asset and stock prices, especially in emerging markets. According to the stated contents, the hypothesis of the research is presented as follows:
hypothesis: There is a negative and significant relationship between the divergence of investors' opinions and the speed of adjustment of financial leverage.
 
3-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 2012 to 2021. In this research, the systematic elimination method was used to reach the sample, and 124 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.
 
4-Results
According to the findings, it was observed that there is a positive relationship between the divergence of investors' opinions and the speed of adjustment of financial leverage, and with the intensification of the difference of opinion between investors, the speed of adjustment of the company's financial leverage increases. The current research provided evidence that shows that the difference of beliefs and opinions in the capital market and confusion in this field can directly affect the most important pillar of companies (financial leverage) and the speed of optimal leverage and optimal debt level achievement. It is surprising that so little attention has been paid to it in the country.
 
5-Discussion and Conclusion
The capital structure is the main pillar of the formation and survival of the activities of a commercial company. The capital structure consists of the amount of debt and capital of the company in order to finance the operational cycle of the company. Considering this and believing that every company ideally searches for an optimal financial leverage and seeks to find that ideal,  the faster the company achieves this goal, the better the financial performance it can achieve. Taking the risks and problems faced by companies into consideration, this is possible with effort and perseverance and special strategic planning in turbulent conditions and current internal and external crises. One of the important measures to achieve the optimal financial leverage is planning in order to know the factors affecting this fundamental factor in the progress of companies. In fact, according to the theories presented in the financial field, one of the important factors affecting the speed of adjustment of the financial leverage towards the optimal leverage can be seen on the other side of the company's capital structure, which is actually the stock price in the capital market and how it is priced; in what form and at what level and at what distance from the intrinsic value of the stock price in the market by informed and uninformed analysts and investors, intentionally or unintentionally and with what intention is being formed. Therefore, the opinions and opinions of investors in the capital market, according to the results obtained from the hypothesis test of the research, directly affect the speed of companies achieving optimal financial leverage. In fact, when the opinions and opinions of people in the market regarding the shares of a company are far apart from each other, according to Peng et al. (2016), the shares will be traded with a higher value than the intrinsic value, and according to the equilibrium theory, in such a situation, if the amount of leverage is higher, the leverage will be adjusted towards the target leverage; Also, it will be done more quickly, so it can be said that the disagreement of investors in the market can help companies to compensate the gap between real and optimal leverage faster. The obtained results are, in a way, complementary to the research results of Peng et al. (2016), Ramsheh and Qarakhani (2016), Silva and Cerquera (2021), and in line with the research of Sun et al. (2022), who acknowledged that the opinions of analysts overlap. The market can reduce the speed of lever adjustment.
 
 

Keywords

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History

  • Receive Date: 05 March 2023
  • Revise Date: 13 September 2023
  • Accept Date: 23 September 2023

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