Investigation of the Relationship between Working Capital Efficiency and Deviation from the Optimal Level of Capital Structure in Firms Listed in Tehran Stock Exchange

Abstract

Objective: Business units are looking for new ways to improve their financial performance and reduce their risk level while financing. Considering previous studies focusing on the role of working capital efficiency on companies finance, we aim to examine the relationship between working capital efficiency and deviation from the optimal level of capital structure. Method: In this research, two main hypotheses are proposed; firstly, to examine the previously mentioned relationship, and secondly, to measure the difference between the efficiency of working capital and the capital structure in terms of over-leveraged and under-leveraged companies. The data sample is restricted to 179 Firms listed in Tehran Stock Exchange during 2006-2017. Results: The results demonstrate that with increasing working capital efficiency, the amount of capital structure deviation from the optimal level can be reduced. In addition, the relationship between the efficiency of working capital and the deviation from the optimal level of capital structure in over-leveraged firms is significantly higher than under-leveraged firms.

Keywords

• working capital efficiency
• optimal capital structure
• over-leverage
• under-leverage