Relationship between Financial Flexibility and Capital Structure

Abstract

This study examines the impact of financial flexibility on firms' capital structure for the firms accepted in Tehran Stock Exchange for the period of 1378 to 1386. The financial flexibility is defined by the stages in life cycle including birth, growth and maturity, and data analysis is performed by multiple regression method. The results show that rising firms issue equity and safe debt and maintain moderate leverage ratios. Firms in growing stage use debt financing mechanism and maintain high leverage ratios, and firms in mature stage rely on internal equity and maintain lower leverage ratios. The results of this research are consistent with the trade off theory, but not with the pecking order theory in the field of developing firms.

Keywords

• financial flexibility
• tradeoff theory
• pecking order theory