Impact of Financing Approach on Corporate’s Financial Performance in Economic Fluctuations (Case Study of Automotive Industry)

Abstract

The question of many financial managers, especially during depression, is that which pattern of financing can bring better financial performance for the firm. This is also a controversial field in literature. For achieving better financial performance, some believe in using more debt in financing because of its tax saving and some believe in using more equity because of less liquidity withdraw. This article is an attempt to make an example of automotive industry to address this issue, so 27-stock companies in a volatile period (1387-1391) or (2008-2012) havebeen studied. To evaluate the effect of financing on financial measures such as cost per unit of debt, earnings per share and earnings per sale, Pearson's correlation coefficient is used. To evaluate the test results and the assumptions of each firmand in each recession period, companies on the basis of two criteria, debt-based and equity-based, havebeen classified. The results show that thestudied equity-basedfirms, due to lower financial costs than the industry average, during the depression have had better financial performance in terms of maintaining liquidity.

Keywords

• Financing
• Economic Fluctuations
• Depression
• Equity-based
• Debt-based
• Automotive Industry