Effects of Entropy of Financial Statements on the Adjustment Speed of Capital Structure

Abstract

The companies with low entropy of financial statements, due to lower information risk and investor confidence, have lower financing costs. These companies have more operational action in achieving optimal capital structure. The main objective of this research is to investigate the effects of entropy of financial statements on the adjustment speed of capital structure in the companies listed in the Tehran Stock Exchange, using the data of 154 companies in the period 2006 to 2016 (totally 1694 years-company). To test the hypotheses, the Generalized Method of Moments (GMM) was used. To estimate the adjustment speed of capital structure, the partial adjustment model was used, and to measure the entropy of financial statements, the entropy, the continuous entropy of Renyi and Shannon were applied. Findings indicated that the entropy factor of financial statements have inverse relationship with the speed of companies in reaching their optimal capital structure. The results showed that the rates of modification for the companies with high and low entropy are 59% and 72%, respectively.

Keywords

• adjustment speed of capital structure
• entropy of financial statement
• continuous entropy of renyi
• continuous