Department of Accounting ,Bandargaz Branch,Islamic Azad University Bandargaz, Iran

Investigating the relationship between the company strategy, capital structure and the accepted companies performance in Tehran stock exchange market

Roya izi

Department of Accounting ,Bandargaz Branch,Islamic Azad University Bandargaz, Iran

Parviz Saeidi

Department of Accounting and Management , Ali Abad Katoul Branch , Islamic Azad University, Ali Abad Katoul ,Iran

Abstract

The current research is aimed at investigating the relationship between the company strategy, capital structure and the accepted companies performance in Tehran stock exchange market. Therefore, 17 industries and 73 companies have been selected among the existing industries in the stock exchange from 2001 to 2010. This study is practical in terms of goal, and is ex-post facto in terms of the methodand is grouped into correlation studies. The research hypotheses were tested by econometric procedures and the software Eviews. The obtained results show that there is a significant relationship between the factors of company's strategy, capital structure and companies' performance. Regarding the degree of the variables effects, the third hypothesis standing for the relationship between liquidity and stock holders' salary return with the highest credit degree (R-S=0.870399) has been proved. In addition, regarding the probability degree, variables belonging to Regression model are significant for all hypotheses of the research at the level of 99%.

1-Introduction

Nowadays, strategy analysis is of much importance due to reaching the goals and outlooks the companies have set for themselves and also changes happened in the environment, competition is indispensable item of business which has been more complex as we entered the third millennium. It is expected to reach a new level after 2050. Such a situation causes a strategic viewpoint to the way of business management. Emergence of such a new management thought named "strategic management" is one of the features of this period. Basis of successful management consists of development and implementing a set of strategies, investment goals, operation goals, providing finance policies.

They should be chosen and analyzed carefully in different economic situations. The key strategies of the management, policies and decisions and cash flow caused by them has a relationship with making values and company value. Value making happens by positive cash fund flow resulted from capital cost rise. Confidently it happens in long term (Ra'i, 2006, p4).

As mentioned earlier, one of the most important aims of economic firms is to receive more profit and increasing the assets of stock holders in long term. Stock holders creditors and other relevant groups with economic firms require reliable information about the managers their performance. On time evaluation of economic firms performance can lead to optimized allocation of limited resources (Rahnamai, 2007, p:161).

An organization tries to set long-term goals and strategic goals in its comprehensive budget and capital. Strategy determines a framework in which a long-term plan can be designed. Management can compare the weak and strong points and competitive benefits of the organization by analyzing the external factors dominating on the organization and set their long-term goals and strategies (Bluechaie, 2008, p:214).

According to Chendler (1962) structure should be obtained from strategy, and if it is not so, it will not have perfect and effective results. Managers often have to choose a strategy among two or some strategies.

Managers' decisions are based on companies' performance and finance results in addition, development strategy can be obtained by relationships and lack of relationships of different companies. One of the most important issues is sale development and the companies' growth capacities each of which has a remarkable effect on companies' performances. Companies' performance has been investigated by management, strategy and finance researcher. As performance goals are the things that companies wish to do it, this structure will be studied very well to discover important variables which presents it. A company needs capital to be established and to develop it needs more capital. The mentioned funds are provided from different resources, therefore, capital structure can have effects on companies (Chandler, 1962).

2-Review of the literature

Vahidi (2013) in a paper named: "environmental incitement, trade strategy, and finance performance" investigated the co-axis model components in the industry of hospital in Malaysia. He concluded that there is a significant relationship between the components of co-axis model. The components of this model consist of strategy, capital structure and environment risk has effects on companies' performance (Vahidi, 2013).

Sou (2013) did a research named "the relationship between company's strategy, capital structure, and company performance in Vietnam companies." In this research, there are two important relationships: 1.Strategy and company performance, 2.Capital structure and company performance have been widely discussed. Most studies ignored the mixed effect of company strategy and capital structure on company performance, but Sou investigated it by using some cases from Vietnam companies (Sou, 2010).

This research could explain the combined effect of company strategy and capital structure on the company performance very well. He showed that managers should put emphasis on management improvement instead of developing liquidity and investors should have much focus on capital structure, because capital structure has effects on total performance of the companies. Another result of this research is that there is no relationship between liquidity and price growth (Sou, 2010).

If companies accept strategy of sale growth, consequently there will be no lateness in customers' payment. In addition, there is positive relationship between growth potentiality and liquidity specially for smaller companies.This result is in contrast with Kim et al findings (1998).

This contrast is resulted from the fact that Vietnam companies distribute their stock among investors in the form of dividends, therefore, it increases company liquidity. In addition, these companies are profitable and have expensive stocks, as a conclusion, growth potentiality increases with liquidity. This research shows that the relationship between liquidity and capital return is unimportant, because customers always pay lately (Sou, 2010).

Chadhari (2010) investigated the effect of capital structure on the company value in Bangladesh stock exchange.

The results showed that a combination of capital and liabilities in which cost of capital has a negative coefficient and should be minimized as much as possible. In addition, it was concluded that company can increase its value in the capital market by changing the structure. However, it can be considered an important policy for financial managers so that they can shape capital structure with implementing liabilities and consequently stockholders' capital increases (Chadhari, 2010).

Medpassi (2010) investigated co-axis and company performance with a multiple-aspect and comprehensive model. This research examined the very important role that strategy plays in response to external environment and internal environment on company performance. As both external and internal environment have effects on company strategies therefore, they have effects on company performance too. Co-axis between organizational abilities, strategy and environment leads to performance promotion. Regarding strategy, issues such as how much managers can affect on a company's performance are still going on. Undoubtedly there is a little space for managers' maneuver among the pressure of different matters such as environmental and economic factors. Therefore, any effect though little, can affect on strategic decisions (Medpessi, 2007).

Chatot & Olsen (2005) conducted a research named "the effects of environmental risk, company strategy, capital structure on company performance in restaurant industry in the U.S".

This research determines variables aspects by using previous researches under the format of interpretations in management and financial scopes of company dealing with environmental risks, company strategies, capital structure and company performance. The relationship between structures and dimensions has been analyzed to find and understand correlations by the use of alternatives. These alternatives have been analyzed based on individual relationships. Unit of analysis was company level. In designing this project, restaurant data have been obtained in a time period. These companies have been selected based on criteria controlling the effects of intra-country.

Therefore these companies, as a part of the sample, have had their proper status in the U.S market. Statistic analysis has been done through Regression. The results showed that the big difference between companies performances can be explained by synchronizing environmental risk, company strategy and capital structure. In addition, hypothetical relationships between variables indicate structures. The results showed that company performance with high variance is in line with co-axis model between model risk, company strategy, and capital structure (Chatot, Olsen, 2005).

Another research done by Adelman (2005) investigated the relationship between company resources, strategies and performances in 92 small companies. Adelman (2005) analyzed the role of strategy by the use of structural equation analysis. Scientific findings showed that resources and not strategies, alone cannot justify companies performance, but companies match their policies with their strategies.

Their motto is "every company, its own matters". Human and organizational resources along with quality strategy and service quality can promote the company performance. He states that neither resources nor strategies can explain the company performance but small companies match their strategies with their resources (Adelman, 2005).

Polalis (2004) conducted a research named "co-axis model in intelligence organizations. The findings provided an useful set of policies theory making specially for intelligence organizations. The more important point was the role of findings stability and also the role of co-axis between an organization trade and strategic information system programming is the cause of general growth development (Polalis, 2004).

Sharma (2002) studied the co-axis model in evaluating tourism industry auditing. In this research, a framework has been introduced to evaluate the way of tourism satellite auditing (TSA). The findings showed that in Tanzania this process is not based on co-axis model and it requires more find (Sharma, 2002).

3-Methodology

3-1-method

This study is practical in terms of goal, and is ex-post facto in terms of the method and is grouped into correlation studies, because its main goal is to determine the relationship between the variables. It investigates the relationship between strategic variables of the company, capital structure, company performance.

3-2-data analysis

To analyze the gathered data, descriptive and inferential statistics has been used. In addition, to test the descriptive statistics, correlation coefficient, Pearson, and Olsen Least Square (OLS) have been implemented by using econometric software Eviews. To look for recognizing the relationship between the variables of company strategy, capital structure, and the company performance has been studied and also it has been attempted to find out which of the factors of company strategy and capital structure can explain the company structure better. Regarding the previous researches, both book value and mediated values have been implemented to evaluate variables.

3-3-Research hypotheses

The variables we would like to study in this investigation are as follows:

1-Company strategy (sale growth, growth potentiality, liquidity)

2-Capital structure (liabilities ratio)

3-Company performance(stock holders' salary return, floated liquidity flow per share)

3-1-1-company strategy

Sale growth

The first dimension of company strategy is sale growth. The average of this growth will be obtained over the years so that we can obtain a unit criterion. Sale growth average helps to find out growth fluctuations.

Sale growth = this year sale - last year sale ÷ last year sale

Growth potentiality

The future growth potentiality of the company is the third dimension strategy of the company which can be obtained by dividing market value of company assets on book value of operational assets. This ratio shows that how good company can supervise its own investment. Ratio higher than one indicates shows a good investment strategy and the ratio lower than one shows weak investment strategy. It was offered because unobserved assets value is not reflected in assets value.

Growth potentiality offers that the company growth chance is the product of investment strategy. The relationship between this variable and other variables of capital structure and performance will lead to growth dynamics. Growth potentiality is obtained by the following equation:

Growth potentiality = whole assets market value average ÷ assets book value

Liquidity:

This criterion is operationalized by short-term and cash investment. The total sum in divided by the whole assets of the company. Then average of the total sum is obtained and it reaches a unified value. It shows the importance of the total assets of the company which is itself cash and is a reflection of proper way of liquidity management.

Liquidity ratio = (securities + cash money) ÷ current assets

3-2-2-Capital structure

Liabilities:

The total liabilities of the company are obtained, then it is divided by the company assets book value. The average of this ratio is obtained during the years so that we can reach a unified value for the liabilities:

Liabilities ratio = (total liabilities ÷ total assets) 100

3-2-3-Performance

With the help of traditional criteria, the company performance is operationalized. These criteria can be divided by financial and accounting criteria. On the other hand, performance financial criteria include: liquidity variables such as liquidity funds circulation per share and operational funds circulation per share. In the current research, both criteria have been used to measure the company performance which are as follows:

Stock holders salary return

This variable represents performance, this ratio is obtained by dividing the company net income by total assets. Then its average is obtained and in a unified criterion to measure stock holder’s salary return.

Stock holders’ salary return = profit after subtracting tax stock holders’ salary return

Floated Liquidity Flow per share

This variable which represents financial issues and liquidity flow of the company is obtained by the following equations, then from these equations sum, the average is obtained and is turned into a unified criterion for free liquidity flow per share. To obtain cash funds circulation, two formulas are used. In this study, the first formula has been used. The capital changes during the mentioned years have effects on the ratio of total stock cash funds circulation. In other words, if a company has capital increase in the mentioned year, the denominator of this ratio changes:

Floated liquidity flow per share =

The first method:

Free cash flow = operational funds circulation – capital pure costs – capital change in net circulation

Operational funds circulation = profit before interest and tax

Capital pure costs = ending period net fixed assets – beginning period net assets + depreciation costs

Net capital in circulation = total existing assets – total existing liabilities

Market size

This variable is operationalized and evaluated by natural logarithm of assets market value and is used as a controlling variable. And it has a high amount of correlation with independent and dependent variables so that they can decrease its interference.

1-Statistic population

The statistic population of the current research includes all companies accepted in stock exchange market provided that stocks of the companies sub-grouped under these industries before 2009 have been presented in the stock exchange market and have been active until 2010, and the financial year of these companies has been finished until March 20th. In addition, they should present their financial statements to the stock exchange for this period. These companies should not have any operational financial loss and loss after subtracting tax and their industries should not be grouped under loss-providing industries. Regarding these limitations, 17 industries from among the active industries and 73 companies have been selected.

4-The research findings

4-1-Reliability and validity of the research

Before testing the research hypotheses, because the research is chronic and is obtained from chronic data, and on the other hand, OLS method has been used in estimating in hypotheses of the research. The requirement for using OLS in Regression, validity of the variables is important. Therefore, reliability and validity tests should be done for the variables of the research. To do so, advanced Dickey Fuller has been used. Before testing the hypotheses, reliability test has been done for every hypothesis, and the variables showed that they are reliable during the time of the research.

4-2-Statistic testing and data analysis for the first hypothesis

H0: There is no significant relationship between sale rate and liquidity condition.

H1:There is a significant relationship between sale rate and liquidity condition.

Table (1): Relevant variables testing

Dependent Variable: rate of salse(rs)
Method: Least Squares
Sample: 1380 1389
Included observations: 10
Variable / Coefficient / Std. Error / t-Statistic / Prob.
potential of growthe (pog) / -0.0021 / 0.000499 / -4.21246 / 0.0029
C / 6.563347 / 1.075793 / 6.100939 / 0.0003
R-squared / 0.689258 / Mean dependent var / 2.050381
Adjusted R-squared / 0.650415 / S.D. dependent var / 0.523152
S.E. of regression / 0.309317 / Akaike info criterion / 0.667959
Sum squared resid / 0.765418 / Schwarz criterion / 0.728476
Log likelihood / -1.3398 / F-statistic / 17.74484
Durbin-Watson stat / 1.63378 / Prob(F-statistic) / 0.002946

Resource: finding research

Structural equations (ARMA) of model hypotheses in the first hypothesis:

Estimation Equation:
rate of salse(rs)= C(1)* potential of growthe+ C(2) = (rs)= C(1)* (pog) + C(2)
Substituted Coefficients:
rs= -0.00210404514*(pog) + 6.563347109

Therefore, regarding the obtained results in table (1) which shows the testing of the relevant variable, it can be said that equivalent coefficient (0.689258) and mediated coefficient is (0.650415) Dourbin Watson value is (1.63378) which is close to 2. Regarding the obtained facts for the above-mentioned statistics, H1 is accepted with 99% confidence. In other words, there is a significant relationship between sale rate and liquidity condition.