The Relationship between Capital Structure and Firm Performance: The Moderating Role of Agency Cost

Amanj Mohamed Ahmed (), Deni Pandu Nugraha and István Hágen
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Amanj Mohamed Ahmed: Doctoral School of Economics & Regional Sciences, Hungarian University of Agriculture and Life Science, 2100 Gödöllő, Hungary
Deni Pandu Nugraha: Doctoral School of Economics & Regional Sciences, Hungarian University of Agriculture and Life Science, 2100 Gödöllő, Hungary
István Hágen: Doctoral School of Economics & Regional Sciences, Hungarian University of Agriculture and Life Science, 2100 Gödöllő, Hungary

Risks, 2023, vol. 11, issue 6, 1-17

Abstract: Since it first appeared, agency theory has argued that debt can decrease agency issues between agent and principal and enhance the value of firms. This paper explores the moderating effect of agency cost on the association between capital structure and firm performance. A panel econometric method, namely a fixed-effect regression model, was used to evaluate the above description. This investigation uses secondary data collected from published annual reports of manufacturing firms listed on Tehran Stock Exchange (TSE) during 2011–2019. Empirical results show that capital structure is negatively related to firm performance. Agency cost also has a negative impact on corporate performance; however, in the case of ROA and EPS, the relationship is positive. Interestingly, the findings illustrate that increasing the level of debt can reduce agency costs and enhance firm performance. Moreover, robust correlations are revealing that agency cost significantly affects the relationship between capital structure and corporate performance. These findings provide proof to support the assumptions of agency theory, which explains the association between capital structure and performance of firms. This study provides new perspectives on the relationship between capital structure and firm performance by using data from listed manufacturing firms in Iran; hence, these new insights from a developing market improve the understanding of capital structure in Asian and Middle Eastern markets.

Keywords: agency theory; capital structure; financial performance; Iran; manufacturing firms (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:11:y:2023:i:6:p:102-:d:1161432

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